CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Bankers Could Go To Jail

Bankers Could Go To Jail

Print
Wednesday, 25 June 2014 04:19

Morning Edition had a strange piece discussing how regulators can punish banks for breaking the law. The piece focused on the various fines and regulatory measures that can be imposed as penalties when banks are found to have broken the law. Remarkably it never considered the underlying logic of the punishment and the likely deterrent effect on criminal activity.

While banks are legal institutions, ultimately it is individuals that break the law. The question that any regulator should be asking is the extent to which the penalties being imposed will discourage future law breaking. As a practical matter, the immediate victims of the measures mentioned in the piece are banks' current shareholders. Since there is often a substantial period of time between when a crime is committed and when regulators discover it and succeed in imposing a penalty, the shareholders facing the sanction will be a different group from the shareholders who benefited from the original crime. This makes little sense either from the standpoint of justice or from the standpoint of deterring criminal activity by bankers.

The imposition of large fines may cause current shareholders to demand the executives who broke the law be fired, but in many cases they will have already moved on to other jobs or retired. In the case of the fraudulent loans that were passed on in mortgage backed securities (MBS) in the housing bubble years, most of the top executives had already left their banks by the time actions were brought by the Justice Department.

In this case, they made enormous amounts of money by breaking the law. The financial crisis may have caused them to retire or leave their banks somewhat sooner than they would have preferred, but almost all of them come out as net gainers from their actions. 

The one sanction that would clearly be effective in deterring bankers from breaking the law would be putting them in jail for breaking the law. It is likely that the prospect of spending several years in prison, along with fines taking away most of their monetary gains, would provide a serious disincentive to bankers who might otherwise break the law. The Justice Department could have pressed cases by showing that top officials in banks had good reason to believe that many of the mortgages they were passing along in MBS were fraudulent.

It is likely that top executives at major investment banks had some knowledge that many of the loans they were securitizing were fraudulent, since there were numerous accounts in the business press about bad loans. There were also widely circulated jokes about the quality of these loans. (It was common to talk about "NINJA" loans, referring to loans where the borrower had no income, no job, and no assets.) It is likely that the top officials at these banks had at least as much knowledge of the loans their banks were securitizing as the people writing about them in the business press. (Deliberately passing along fraudulent loans is fraud.)

 

Comments (8)Add Comment
Eric Holder Agrees: If Bankers are Punished It Could Bring Down America
written by Last Mover, June 25, 2014 7:46

Exactly. Any economist knows when the punishment is not swift and certain it is useless. Like other predators who run the country, bankers have long known that penalties for breaking laws are simply a cost of doing business.

Even better is to manipulate laws to advantage speed and kill transparency, so hit and run con artists get off scott free and leave rest flatfooted to pay big time for the carnage.

Bankers are like cold blooded killers who laugh at the death penalty as a deterrent. By the time the state gets around to executing them after getting caught, the deterrent effect on current bankers and killers is nil.

What, you think that bad guy with a gun is calculating the likelihood of the death penalty before pulling the trigger?

Give Eric Holder some credit America. Not only does he understand that like murderers, actually putting bankers in jail after the fact is a dangerous precedent.

Threatening bankers with jail going forward is equally dangerous for America as well, even after letting them off the hook for past crimes. See, then they would understand that financial crime is no longer a mere cost of doing business as they set about destroying the whole of America itself.

Holder knows well this is the real threat to America and he deserves credit for removing it while keeping his eye on the ball and going after real problems, like cold blooded murderers already convicted in the media long before Holder notices them.
This policy traces back to the Nixon Pardon by Ford
written by John Wright, June 25, 2014 9:08
I suggest Gerald Ford's 1974 pardon of Nixon set the stage for many of these "too important to jail" policies.

Ford stated, "in the best interests of the country", he was pardoning Nixon for "any crimes he might have committed against the United States while President".

http://en.wikipedia.org/wiki/Gerald_Ford

And the establishment bought into this idea, with the Kennedy libary awarding a "Profile in Courage" honor to Ford in 2001 for this "courageous" pardon.

Maybe Holder and Obama are simply earning their future Profile in Courage awards by refusing to prosecute any important people involved in financial fraud?

Holder/Obama may be simply following the advice of a local Northern California bail bondsman's radio ad, "friends don't let friends do time".
...
written by skeptonomist, June 25, 2014 9:40
Housing and mortgages worked just fine without securitizing or credit-default swaps. The government supported housing through the FHA and other programs during the recovery from the Depression and after WW II. There was a huge housing boom and no bubble and collapse.

Punishing CEO's after they take advantage of these financial innovations will never work for several reasons - for one thing there are too many ways they can escape when their institutions are so powerful. The practices leading to excess leveraging and fraud need to be prohibited in the first place. Of course it would also help to break up the enormous banks, or to give significant control in these establishments to the government (which could have been done in the crisis, as recommended by Dean and some others).

The Maestros of the Fed obviously can't be counted on to determine when leverage is getting dangerous or when financial behavior is getting fraudulent - especially when the institution is dominated by bankers or those chosen to be bank-friendly.
I was thinking the same thing
written by Stephen Stein, June 25, 2014 10:14
I was thinking the same thing while listening to this piece, but the majority of it seemed to be talking about FOREIGN banks. It would be difficult indeed to put foreign nationals in jail - where is our jurisdiction?

Domestic bankers, yes, by all means, jail them if they're shown to deserve it.
Jail the Corporation with the CEO
written by Pookah Harvey, June 25, 2014 10:47
Why not jail the CEO and the Corporation? Seeing as Corporations have been given citizen's rights they then should also take on a citizen's responsibilities. If they break the law they should be incarcerated.

While in prison a prisoner is given a wage for designated work which profits the government. In Ohio prisoners' wages are 11 cents an hour.

Since you can't actually place a corporation in jail, you could "virtually incarcerate" them. For example "virtually incarcerate" Goldman-Sachs. Their designated work would be banking. Collect the profits from their work while they serve their sentence and return to them 11 cents an hour as their wage for working. The government would keep the rest.

I'd go as far as paying them for 24 hours a day of work but as a person that would be cruel and inhumane.
...
written by Dryly 41, June 25, 2014 12:59
The NINJA loans were made by mortgage brokers such as Ameriquest and New Century with money provided by the Wall Street banks which were then "securitized" i.e. bundled into layers of "collateralized debt obligations" consisting of subprime loans. These CDO's were given AAA ratings by the ratings agencies paid by the Wall Street banks. This made it much easier to sell the junk. All along the food chain made money. It sure looks like something that would come within the sweep of the Racketeering and Corrupt Organization Act.

After Reagan signed the deregulation of the Savings & Loan banks in 1982, of some 3,200 S & L's, 747 failed and another 250 were taken over by the Federal Home Loan Bank Board. The FHLBB made 11,000 criminal referrals, and, the Bush I Justice Dept. obtained something like 839 convictions, including the poster boy, Charles Keating, so 90% got away with wrongdoing.

The Silverado Savings & Loan in Denver, Colorado failed costing the taxpayers $1 billion. One of Bush I's n'eer do well sons, Neil Bush, was a director of Silverado where he authorized loans to corporations which he had an interest without disclosing his interest. You can't put Bush I's kid in jail but they clawed back the money, and, barred him from further involvement in banking, which, I think, is a real deterrent.

It used to be that we had a principle in the United States that no man was above the law be he president or be he pauper. An exception has been carved out for Wall Street bankers who are above the law. When the SEC or Justice Dept. goes after a bank, there is a fine which is paid by the owner's of the bank i.e. shareholders who did nothing wrong while the managing agents who actually did wrong are not only not prosecuted, they are not even named or shamed. And, they are permitted to practice finance, which, no lawyer or accountant or physician who committed functional equivalent wrongdoing would be permitted to do.

This is not only not a disincentive to clean up the corruption, it is, in reality, an incentive to wrongdoing as the gains are privatized and the losses socialized.
one quibble
written by Sideshow Bill, June 25, 2014 3:37
"along with fines taking away most all of their monetary gains, would provide a serious disincentive to bankers who might otherwise break the law."
The statute of limitations is about to run out for that fraud
written by Blissex, June 27, 2014 8:56
As some magazine was pointing out the statute of limitations has run out or is about to run out for many of the financial crimes committed by insiders during the most recent giant wave of corporate larceny...

Thanks to the repeal of Glass Steagall a lot of investment banks have merged with the commercial banks who own the payment system, for example the system of letters of credit, and they have made iAs some magazine was pointing out the statute of limitations has run out or is about to run out for many of the financial crimes committed by insiders during the most recent giant wave of corporate larceny...

Thanks to the repeal of Glass Steagall a lot of investment banks have merged with the commercial banks who own the payment system, for example the system of letters of credit, and they have made it clear that they are holding the payment system hostage and if they get trouble they will make trouble.

Convicting bankers of fraud triggers the standard clause in all securities contracts that when tainted by fraud the buyers can ask for a 100% refund of the price paid, even on securities that trade for 5-10%. This would trigger the bankruptcy of most USA banks, and the complete shutdown of the payment systems being held hostage by those banks, leading to widespread collapse of supply chains and hunger and civil disorder.

Therefore the bankers who hold hostage the payment system are untouchable. They can do anything they want (discreetly) because they are too important to jail.t clear that they are holding the payment system hostage and if they get trouble they will make trouble.

Convicting bankers of fraud triggers the standard clause in all securities contracts that when tainted by fraud the buyers can ask for a 100% refund of the price paid, even on securities that trade for 5-10%. This would trigger the bankruptcy of nearly all or all USA banks, and the complete shutdown of the payment systems being held hostage by those banks, leading to widespread collapse of supply chains and hunger and civil disorder. The USA government is never going for ideological reason to provide an alternative, non-private, payment system, so there.

Therefore the bankers who hold hostage the payment system are untouchable. They can do anything they want because they are too important to jail.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives