Corporations are considered people when it comes to spending shareholder money secretly to thwart public policy goals on health, safety, the environment, and the economy. But somehow they are not people when it comes to accepting responsibility for illegal or even criminal behavior. Instead, the government settles for fines, which are paid not by the people involved but by the corporation, meaning the shareholders.
The government should never settle a criminal case against a corporation unless:
- The CEO, top executives, and, when appropriate, the members of the board make substantial personal contributions -- not reimbursed by the company -- to the fines that are imposed.
We are all familiar with the problems created by companies that are "too big to fail." But problems are even more prevalent in companies that are "too big to succeed," "too big to control," and "too big to behave." Perverse incentives reward executives, who can get paid more when the company is bigger instead of when it does better, and investment bankers, who get paid to broker deals that expand the size of companies regardless of the outcome. Therefore, we have encouraged the creation of enterprises that are so monstrously gargantuan they are beyond the capacity of any group of individuals to oversee in a meaningful and cost-effective fashion. The result, as Bob Monks and I wrote in our first book, is that the corporation is an "externalizing machine, in the same way that a shark is a killing machine--no malevolence, no intentional harm, just something designed with sublime efficiency for self-preservation, which it accomplishes without any capacity to factor in the consequences to others."
On May 20, the Justice Department announced that
Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland plc have agreed to plead guilty to conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market and the banks have agreed to pay criminal fines totaling more than $2.5 billion....The Federal Reserve also announced that it was imposing on the five banks fines of over $1.6 billion; and Barclays settled related claims with the New York State Department of Financial Services (DFS), the Commodity Futures Trading Commission (CFTC) and the United Kingdom's Financial Conduct Authority (FCA) for an additional combined penalty of approximately $1.3 billion. In conjunction with previously announced settlements with regulatory agencies in the United States and abroad, including the Office of the Comptroller of the Currency (OCC) and the Swiss Financial Market Supervisory Authority (FINMA), today's resolutions bring the total fines and penalties paid by these five banks for their conduct in the FX spot market to nearly $9 billion.
Almost all of this activity occurred after the financial meltdown of 2008 and the bailout era, when Wall Street theoretically was on notice to be scrupulous about behaving in an ethical and legal manner. But there was no ambiguity inside the companies as they created the fraudulent transactions. They actually referred to themselves as "the Cartel" in their online communications and they used codes to hide their coordinated efforts to divert profits away from customers and competitors. UBS actually not only broke the law, but violated the terms of its own previous settlement for earlier violations.
While the Justice Department announced that the companies have agreed to a three year "probation" and, as investigations continue, individuals may be charged, there were no elements of the settlement that affected any of the top officers or directors. As for the "disclosure notices" the financial institutions have agreed to send, explaining their fraudulent behavior, Matt Levine wrote an excellent piece for Bloomberg pointing out that the highly obfuscatory notices characterize the actions resulting in billion dollar fines not as crimes, just "practices." He discusses one example from JP Morgan.
And the disclosure notice just describes [the "practices"]. It stops after the bullet points. It never says "and those practices were wrong." Or "and we're sorry we did those things." Or even: "and we'll stop doing them."
Because they won't!...The disclosure notice, which JPMorgan has to send, starts with an apology and then goes on to list some things that JPMorgan did in the past. The client letter, which JPMorgan wants to send, starts with a defiant "no ambiguities or misunderstandings" and then goes on to list some things that JPMorgan will keep doing in the future....There is no promise of reform here: The Justice Department caught the banks doing things that it didn't like and fined them billions of dollars, but won't stop them from doing most of those things.
The Attorney General's statement says that
[T]his Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers. The penalty these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct. It is commensurate with the pervasive harm done. And it should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.
And yet, it is not only not deterring the very "long-running and egregious" behavior that resulted in the harm to public welfare and the billion-dollar fines; it is allowing most of it to continue.
It gets worse.
Senator Elizabeth Warren notes that rulings are already reversing a significant portion of the penalty assessed against these "long-running and egregious" violators. Companies who violate the law are supposed to be restricted from handling some kinds of accounts, like retirement savings, that are considered to be especially in need of oversight only by those with exemplary records of integrity. The SEC has already granted waivers to the financial institutions to enable them to continue to do business as usual, and the Labor Department has been asked to do the same. Senator Warren has asked the Labor Department not to issue waivers without hearings.
The SEC has already granted waivers to each of these banks without any detailed explanation, but it is not too late for the Department of Labor to hold a public hearing before it decides that such brazen lawbreakers can be trusted managing workers' retirement accounts.
So, this "brazen" law-breaking has resulted in fines that will have almost no effect on the company or the executives responsible. This problem is not new. Edward Thurlow, 1st Baron Thurlow, who served as Great Britain's Lord Chancellor in the 18th Century, famously said, "Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like." One of the key founding concepts of the corporation was perpetual life -- that it could continue beyond the lifespan of any individual, in order to encourage investment, continuity, and long-term planning. But if we are going to treat them as people when it comes to participation in the political process, then we have to treat them as people when they commit crimes. The executives and directors who are responsible must be personally accountable. And when companies are too big to control, their shareholders, customers, and employees will all do better if we impose capital--in both senses of the term--punishment.