Needed: Financial Nuremberg Trials
“Citigroup and U.S. Reach $7 Billion Mortgage Settlement.”
—headline; NYT (7/14/14).
“BNP Paribas SA agreed to pay nearly $9 billion and plead guilty to crimes for violating U.S. sanctions, an unprecedented settlement that includes a year-long ban on the French bank’s ability to conduct certain U.S. dollar transactions.
–“BNP Paribas Draws Record Fine for ‘Tour de Fraud'”; The Wall Street Journal (June 30, 2014).
So, rogue banks are finally being held accountable for their bad behavior, right?
Wrong.
In fact, there’s a clutch of reasons that civil fines — no matter how many zeroes they carry — are a miscarriage of justice:
One. They punish the wrong people. Twice, in fact.
Citigroup shareholders lost 98% of their investment in the wake of The Crash of 2008.
With today’s $7 billion civil settlement, they’re now taking another hit.
Call it adding (multi-billion) insult to injury.
Bankers who make ultra-leveraged bets that blow up (credit derivatives); undertake exotic hedges that blow up (“London Whale”); underwrite fraudulent securities that blow up (securitized mortgages) etc. — detect a theme?? — did grievous harm to their banks, tanking their stocks and causing huge losses to their shareholders.
That includes pension funds representing millions of retirees, not just well-heeled fat cats.
Further exacerbating investors’ punishment: the prodigious legal fees spawned by such misconduct, footed by the banks — shareholders again — not the malefactors.
Two. Fining banks civilly does nothing to hold the individual culprits accountable.
According to the WSJ, “no BNP Paribas employees face criminal charges. In total, 45 employees were disciplined in some fashion, ranging from termination to warnings, according to court documents filed in connection with the settlement.”
The correct response to illegal (and very greedy) behavior is to take away the liberty of the perpetrators.
Which means prison.
Period.
Three. Civil fines aren’t real punishment.
So, how onerous did the markets deem BNP Paribas’ agreement to pay a $9 billion fine to the U.S. Justice Department to settle charges that it methodically laundered billions headed for Sudan, Iran, and Cuba?
Not very: its stock was up €1.78 the day of the announcement, to €51.33 Euros.
Ditto Citigroup’s stock today.
Which certainly makes one wonder how much of a deterrent such fines really are (never mind punishing bad behavior).
Lingering Taint on Banking Industry
Ultimately, there’s an even more powerful reason to identify and punish bad actors: failing to punish a small minority stains the reputation of the broad majority.
Indeed, the entire banking sector is still the object of widespread public disgust if not wrath coming up on six years after The Crash.
Which is both unfortunate and largely undeserved.
Out of BNP Paribas’ 185,000 employees, my guess is that at most a couple hundred — a fraction of 1% — are culpable for its illegal activities.
I’m sure the same ratio holds true at Citigroup, which has an even bigger head count (251,000).
“Justice Delayed”
Not identifying and punishing the culpable few leaves a taint on everyone else.
Which is perhaps the most pernicious side effect of failing to punish especially brazen financial criminals: if no one’s guilty, no one’s really innocent, either.
The result is a morally confused society, with tarnished institutions, discredited business and political leaders — and a cynical, jaded citizenry.
Sound familiar?
See also, “Jon Corzine and MF Global: Justice Delayed.”
P.S.: Since every modern evil ultimately gets compared to that benchmark of evil — the Nazi’s — here’s mine: until the U.S. conducts the equivalent of a financial Nuremberg trials, there’ll be no closure on the The Crash of 2008 and the very dysfunctional financial system that gave rise to it (and unfortunately, is still very much with us).
Back in the ’30’s, the inquiry led by Ferdinand Pecora played that role.
