Financial Res Ipsa Loquiter – Part 2
[Note: please return to this post after reading Part 1]
Even people who agree that holding Wall Street accountable is a laudable goal are likely to raise four objections. The most serious arguments — and the rebuttals — are:
One. “No laws were broken.”
Specifically, the SEC allowed Wall Street investment banks to borrow 35:1; the Financial Accounting Standards Board (“FASB”) permitted companies to keep toxic debt off their balance sheets; and even the credit rating agencies put their “seal of approval” on the securitized debt.
Rebuttal: This is nothing more than financial chutzpah (the regular kind is defined as killing your parents, then throwing yourself on the mercy of the court because you’re an orphan).
When it comes to regulation, Wall Street got exactly the rules it wanted, or, in the case of credit derivatives, forbearance on the ones it didn’t.
Investment banks, led by Goldman Sachs head (and future Treasury Secretary) Henry Paulson pressured the SEC to raise permissible leverage. The same crew dismantled Glass-Steagall, the Depression-era bulwark separating investment and commercial banking. FASB has long been intimidated by the companies it purports to regulate. And companies like Standard & Poor’s and Moody’s were co-opted by gaudy Wall Street fees much the same way Arthur Andersen was seduced by Enron.
Two. Holding Wall Street’s senior executives accountable for their actions will be bad for the market and the country’s morale.
Rebuttal: Not holding them accountable is bad for the markets and morale.
Three. It’s logistically impractical — and legally cost-prohibitive — to figure out which executives did what, when, and what their motives were. In a world where Exxon is still appealing liability for the Exxon Valdes spill, Hell will freeze over before Wall Street executives head to prison en masse.
Rebuttal: That’s why the burden of proof needs to be shifted to the companies. In fact, don’t stop there: require the companies to identify which individuals were most responsible for their corporate conduct — after all, they’re the ones in the best position to know. Such a tack also avoids the inevitable, Eichmann-style “we were just following orders” defense.
If the companies don’t finger the responsible persons . . . hold the board of directors responsible instead.
Four. Such an approach smacks of collective — not to mention “cruel and unusual” — punishment.
Rebuttal: Collective punishment for collective behavior is eminently appropriate.
Just like Madoff, none of these senior executives acted alone; they were part and parcel of a culture that partook of the rewards and sloughed off the risks and responsibility.
Given the economic harm wrought by their actions, it’s hard to argue that any punishment, however severe, would constitute “cruel and unusual.” Besides the direct economic cost — already in the trillions — the indirect cost to the financial system, measured in broken lives and destroyed trust, is incalculable.
In any case, there is ample precedent for imposing disproportionately harsh punishment when the public policy stakes are so high.
That’s exactly what the Supreme Court has opined in numerous cases brought by members of the posse comitatus, famous for filing expletive-filled tax returns (if they file them at all) — and drawing very long prison sentences as a result.
According to the Supreme Court, the Internal Revenue Service relies on a system of voluntary compliance. It is allowed to make examples of the few to “encourage” the majority to do their duty.
Capitalism is no different. If the worst kinds of greed and self-dealing go unchecked, why should ordinary citizens behave? Or trust such a system with their life savings?
Before taxpayers replenish the hen house that has just been so spectacularly looted — or set about the long-term task of restoring security — it would seem wise to apprehend the foxes who made off (sorry, couldn’t resist) with the chickens.
Or, to put it in slightly less modern terms, society should take steps to assure that “as you reap, so shall you reap.”