There has been a fair amount written recently about various institutional cartels that are thriving in the US despite antitrust laws designed to prevent their existence.

My previous column compared Wall Street's few remaining investment banks to a cartel, with explicit pricing power over its hundreds of thousands of customers, an advantage that will only grow greater as the economy improves and the number of thriving banks continues to diminish.

Likewise, Joe Nocera, a columnist for the New York Times, has been on a crusade about the powerful grip the National Collegiate Athletic Association (NCAA) exerts on college sports. Nocera has argued eloquently — if not entirely persuasively — that college athletes should be paid to play.

On January 6, Nocera dubbed the NCAA's system of justice a "Star Chamber" and shared the sad story of how Devon Ramsay, a fullback on the University of North Carolina's football team, suffered needlessly from NCAA-imposed penalties.

Well, it turns out, Wall Street has its own version of a Star Chamber, and it is every bit as unfair and debilitating as the NCAA's.

Price of admission

Probably unbeknownst to the millions of people who interact with Wall Street every day — either as brokerage customers or as employees of Wall Street firms — there is a price of admission to this world tucked deep inside the boilerplate documents that one must sign to open an account or to get hired.

This catch is a non-negotiable agreement for times when disputes arise, say, about a bonus promised but not paid, or about a rogue broker who sticks his client's money in a synthetic collateralised debt obligation that goes bust. Under the deal, the only venue to litigate the claim is a mediation or arbitration process overseen and administered by the Financial Industry Regulatory Authority (Finra), Wall Street's powerful self-regulatory organisation.

Finra oversees some 4,460 brokerage firms and 630,000 registered representatives, mostly brokers, traders and bankers. By signing the initial agreements, you agree not to pursue any future monetary claim against Wall Street in the US court system.

This requirement, which affects millions of people, may be the largest ongoing abdication of legal rights in America today. And there is not even the slightest effort being made to change this injustice, although there certainly should be.

So how does arbitration work? Once a grievance has been filed with Finra, generally speaking, a three-member panel is convened in downtown Manhattan or other selected cities to hear the facts and circumstances around the dispute over a period of months.

Complex agenda

Unlike in a court setting, the hearing is not continuous until completion, but proceeds in fits and starts, and can take longer than a year to be resolved.

The arbitrators are often retired Wall Street brokers. They are paid an "honorarium" that can run into thousands of dollars per case.

Of course, most of Finra's almost $1 billion (Dh3.67 billion) in annual revenue comes from fees paid by its Wall Street members related to regulatory, contract and dispute-resolution matters. In brief, Finra exists for the benefit of Wall Street and to advance Wall Street's complex agenda — one component of which is disposing of nasty financial claims against it as painlessly as possible.

So, say you bring a complaint, what are the odds of success? According to Jeffrey Liddle, a New York lawyer who represents plaintiffs in their battles against Wall Street, the success rate for former Wall Street employees in arbitration against their firms has been declining in recent years, with arbitrators now awarding a recovery in only about 37 per cent of cases.

No recovery

Of those who win, says Liddle, arbitrators only award around 13 per cent of the damages sought. The majority of the cases, he says, end in no recovery whatsoever for the plaintiff. Few Americans today are going to shed a tear for fired Wall Street bankers and traders. But it just isn't right that the only way the millions of people who work at banks or do business with them can resolve their disputes is through a kangaroo arbitration system overseen by Wall Street itself.

— Bloomberg

 

William D. Cohan is a former investment banker and theauthor of Money and Power:How Goldman Sachs Came to Rule the World.