"The struggle of man against power is the struggle of memory against forgetting."
So wrote Milan Kundera in The Book of Laughter and Forgetting. It is one of my favorite quotes and it popped into my head as I was reading about last week's settlement between JPMorgan and the SEC in which the banking giant agreed to pay a $25 million penalty and cancel $647 million in fees owed by Alabama's Jefferson County as the result of a complicated derivatives deal that blew up in the county's face.
As part of the settlement, JPMorgan neither admitted nor denied wrongdoing -- despite ample evidence that it had engaged in plenty of wrongdoing. Things like paying off local officials with millions to win no-bid contracts worth billions and convincing county officials to switch from fixed-rate bonds to bonds hedged with risky derivatives -- a switch that has driven Jefferson County to the brink of bankruptcy. "We have been victimized by our creditors," said a county official.
JPMorgan released a statement that it was "pleased to have reached a settlement with the SEC," and acted as if it was practically a disinterested party: "The charges relate principally to municipal transactions that occurred six and seven years ago. JPMorgan has since discontinued that business, and the employees in question are no longer employed by the firm."
So no wrongdoing admitted, and time to move on to the next lucrative money-printing scheme. How tidy. This is what passes for justice on Wall Street these days. If you commit a petty crime and hammer out a plea bargain, you'll have to admit wrongdoing as part of the agreement. But put on a suit and commit a billion dollar crime and you won't even have to admit you did anything wrong. It'll be as if it never happened. Which, of course, makes it much more likely that it will happen again.
We saw the same dynamic played out earlier this year in the legal saga surrounding the $3.6 billion in bonuses that was awarded to Merrill Lynch executives just before the failing firm was acquired by Bank of America (with a lot of help from American taxpayers, who bailed out BofA with $45 billion).
It appears that Bank of America executives failed to inform their shareholders that, as part of the acquisition, they were going to give billions to the executives who had been at the helm while Merrill lost $27 billion in 2008. Had the shareholders been told, the news would more than likely have put a crimp in the hastily arranged deal.
Many thought the matter was closed back in August when the SEC reached a settlement with Bank of America in which the banking giant would pay a $33 million fine but -- you guessed it -- admit no wrongdoing.
Of course, lots of wrong was done in that case too -- something that was implicit in the bank's willingness to pay the multimillion-dollar fine. Specific people had made very specific decisions surrounding the Merrill Lynch bonuses -- including not informing their shareholders.
But, instead of going after them, regulators went after the company, gave it a minor ding to its bottom line, and were ready to forget the whole thing.
Last year, the total of amount of fines levied by the SEC was the lowest since the corporate scandals of 2002 led to stricter enforcement regulations. So while the financial system was on a fast track to near-collapse, the SEC was taking its hand off the brake. And the perpetrators of that near-collapse are being allowed to avoid accountability. When crimes are uncovered then resolved with no acknowledgment that a crime was ever committed, that's a recipe for anarchy -- not for a healthy democracy.
It's really not that complicated: if you do the crime, you do the time. But the people who run the show like to make it seem like it is very complicated -- all the better to obscure the simple moral principle of right and wrong. Why should it matter whether you commit your crimes in a fancy boardroom or on the street? If you were reaping the (often enormous) benefits of your crime, why don't you have to admit wrongdoing when you're caught, and pay a commensurate -- not a token -- penalty?
As it happens, there are some heroes out there who have noticed that the ambiguous way our laws are being enforced has diverged from the unambiguous morality the laws are based on.
In the Bank of America case, the hero is U.S. District Court Judge Jed Rakoff. Instead of rubber-stamping the BofA/SEC settlement as everybody expected, Judge Rakoff refused to sign off on the deal, which he called a breach of "justice and morality" that "suggests a rather cynical relationship between the parties."
And Judge Rakoff demanded to know who exactly were the executives who knew about the bonuses and decided not to disclose them. Instead of a faceless company, shouldn't the culpability, Rakoff asked at a hearing, be on "the individuals who were responsible?"
But rather than naming those responsible, Bank of America claimed it was all the fault of its lawyers -- an excuse that, shockingly, the SEC bought, saying the fact that the bank's executives had relied on legal advice would present "substantial obstacles" to prosecution.
Judge Rakoff wasn't buying it -- he saw the slippery slope that thinking would lead to: "It would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel," he said.
Rakoff has a history of actually applying the law. Back in 2003, he rejected a settlement with WorldCom because the fine was too low.
When he first became a judge, prosecution used to focus more on individuals instead of companies. "The feeling then," he said, "was if a crime had been committed, it was important to discover who the persons were who made the wrongful decisions."
Judge Rakoff's display of spine appears to have rubbed off on the SEC, which now says it will aggressively pursue its case, taking Bank of America to trial. And there have been other ripple effects: after initially stonewalling a congressional committee looking into the Merrill acquisition, the bank agreed in September to hand over some, but not all, of the documents the committee had requested. And in October, it agreed to turn over to the SEC and the New York Attorney General's office documents revealing the legal advice it received regarding the Merrill deal -- an unusual waiving of attorney-client privilege. What's more, Brian Moynihan, the bank's onetime general counsel and a contender to succeed departing CEO Ken Lewis, will testify before the House Oversight Committee next week about his role in the Merrill takeover.
Of course, it's not just our "too big to fail" banks that have been allowed to do wrong without having to admit to any wrongdoing. The pharmaceutical industry and health insurance companies have been doing the "pay the fine but admit nothing" dance for years -- chalking up the millions (and sometimes billions) they have been fined as the cost of doing business.
But with the banking, drug, and insurance industries all finding themselves at a crossroads, now is a very good time to revoke the Get Out of Jail Free card those at the helm of these companies have been given for far too long.
We all know that there was a great deal of wrongdoing that led to the near-collapse of our financial system and to our badly broken health care system. The first step to reforming each of them is to acknowledge that wrongdoing -- and to seek the real punishment of the wrongdoers.
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