The Broken Technology of Global Banking

Have you noticed how frequently the technology of the global banking industry has been failing lately? Based on recent events, one might gain an impression that its infrastructure is thoroughly broken.

For instance, just a few days ago, JP Morgan Chase acknowledged that hackers broke into its proprietary systems and accessed the confidential accounts of an astounding 76 million households and 7 million small businesses. Although the all-time record for account hacking remains the 110 million customers of Target who were victimized last winter, the JP Morgan Chase announcement was indeed a stunner.

At roughly the same time, Ben Bernanke, the former Chair of the Board of Governors of the Federal Reserve Bank System of the United States, told an industry conference that his recent application to refinance a personal mortgage loan was rejected by his financial institution.

Huh? Why would any institution reject the loan application of the banker who saved the United States, and perhaps the global economy, from a second Great Depression in 2008/09? Bernanke didn’t provide the reason, but Businessweek speculated that the automated credit algorithm might have rejected him for failing to hold a full-time job.

That’s true; Mr. Bernanke is not an employee of any organization. Instead, as an independent contractor, he earns $200,000 per appearance as a public speaker and $1 million per book as an author. But because he reports these earnings via Forms 1099 (instead of Forms W-2) on his tax return, the credit algorithm may have downgraded — or entirely ignored — his income.

Finally, yet another technology “break” with an ethical twist was also announced last week. Apparently, the Bank of America is “addressing the concerns raised” by the Federal Reserve Bank of Richmond regarding its dividend arbitrage service.

What is dividend arbitrage? It is a service that exploits the fact that private corporations pay dividends to investors on pre-announced dates. The Wall Street Journal explained that investors thus evade taxes when: “the banks temporarily transfer ownership of a client’s shares to a lower-tax jurisdiction around the time when the client expects to collect a dividend on those shares.”

One might argue that the technology underlying the practice of dividend arbitrage isn’t broken at all. In fact, it appears to be achieving its purpose of helping bank customers execute what CBS Moneywatch calls a “tax avoidance scheme.”

Nevertheless, others might argue that the bank, in essence, is laundering money through a lower-tax jurisdiction to enable customers to evade the payment of income taxes. Although the use of such technology for laundering funds may not represent a broken system of operations per se, it may nevertheless represent a broken system of ethics.