The background here is that the SEC is currently seeking the power[0] to impose fines without judicial review:
Even as Judge Jed S. Rakoff of Federal District Court in
Manhattan rejected the Securities and Exchange
Commission‘s proposed settlement with Citigroup because he
did not find it in the public interest, the agency’s
chairwoman, Mary S. Schapiro, sought to enhance the
S.E.C.’s authority to impose higher financial penalties to
deter securities violations. An important part of her
proposal would allow the S.E.C. to seek the increased
penalties in administrative proceedings, a move that may
allow the commission to avoid having to pursue its cases
in federal courts in the future, skirting the kind of
scrutiny Judge Rakoff applied.
This article is a press hit[1] by the SEC's PR folk[2] which encourages people to call for stiffer penalties against those evil firms. Bingo, SEC gets a powerup. The "grassroots" outcry means they can now just ticket & fine companies without the meddling checks and balances of the federal courts system.
The SEC's fines have about as much to do with preventing a financial meltdown as local police traffic fines have to do with preventing a murder. It's just safety theater.
That is, everyone is familiar with the local/state government phenomenon of cops who ticket to make quota at the end of the month. Whether you are "breaking the law" today depends in large part on whether state/local government needs to make money off you. Tickets for expired registration are profit centers, robbery investigations are cost centers.
The federal government is subject to many of the same dynamics, except that it isn't called on the carpet in the same way because federal agencies can intimidate those with knowledge of the situation into silence. Once in a while data comes out on the corruption and malfeasance of (e.g.) FDA[3] or EPA[4] or SEC[5] bureaucrats, but for the most part they have the guns so they are dishing out the punishment.
The NYT's role in all this is to act as stenographer. There is no summary of how much the SEC sought to earn in fines from pursuing these prosecutions, nor how many of them were overturned or thrown out of court.
I would add the the SEC is a notoriously corrupt organization in that they need the banks help in order to understand what is going on AND people who work for the SEC tend to find their way into cushie bank jobs. The idea of giving them more power doesn't seem to me like any kind of solution at all.
The real problem is that people just don't care enough about white collar crime. When someone mugs you for $5 you want vigilante justice, but when billions (trillions?) of dollars are on the line, we are happy to just shrug our shoulders.
Who said people were happy about it? I think there's a lot of anger at banks at the moment for perceived corruption. But there's a huge gap between voters caring and measures that are actually effective being put in place with lots of lobbying in between (and I have no idea what measures would be effective; and many people that do probably are also in a position to get a cushie job helping to avoid or lobby against those measures at a bank).
Punitive damages on a geometric scale for repeat offences in a 10 year period? 3 times profit made plus any damages for first re-offence, 9 times for second re-offence. Sounds similar to training a child to go to sleep on their own...
I'm guessing the devil is in the detail (and I don't know much so I'll shut up shortly) - could companies set up shell legal entities to offend for them / shop around for a better jurisdiction to do dodgy deals in / is current law clear enough that serious penalties wouldn't end up having a chilling effect on all business (OP was implying that the current status is that if the SEC wants to, they can probably find some law you're breaking). Serious penalties would probably demand a lot of legal boilerplate to make absolutely sure 'good business' wasn't effected and the government doesn't have power to destroy politically inconvenient companies without due process; the more boilerplate, the more likely the more expensive lawyers at the banks will outwit the lawyers writing the laws. Add some (possibly sponsored) political rhetoric about regulations killing jobs in a recession and I think it gets very hard to actually nail it down.
I think Occupy Wall Street demonstrates that many folks do care, and are quite upset about it. Finding something effective to do about it may be tougher.
I'd like to see the results of a survey where the only question was "Would you like to see very unpleasant vigilante justice perpetrated on the executive staff of banks involved in the subprime mortgage crisis of 2008?"
I think you're underestimating the degree of bloodthirstiness. I sometimes wonder if Occupy Wall Street wouldn't play better with Middle America if they dropped the whole Gandhi-worship PR schtick (which Middle America seems, by and large, to despise rather than admire) and more openly advocated violence against investment bankers, specifically.
> I think you're underestimating the degree of bloodthirstiness. I sometimes wonder if Occupy Wall Street wouldn't play better with Middle America if they dropped the whole Gandhi-worship PR schtick (which Middle America seems, by and large, to despise rather than admire) and more openly advocated violence against investment bankers, specifically.
"Middle America" seems to know that it wasn't investment bankers that gave govt money to banks. And, they're reasonably receptive to the accounting that shows that financial TARP was break-even to modestly profitable.
However, they're incensed about the bailouts that are costing money. For example, bailing out GM pensions isn't popular and largish govt worker pensions are even less popular. And then there are the Fannie and Freddie money-pits.
I've gotta disagree on "what america's concerned about". When's the last time you heard someone who wasn't employed by fox news actually say anything about GM pensions?
> When's the last time you heard someone who wasn't employed by fox news actually say anything about GM pensions?
I've heard actual humans say it. I didn't quiz them as to why.
As to Fox, do you actually listen to/watch Fox or are you just guessing/getting it second hand? (I ask because several months ago, I watched enough to discover that most people who talk about what's on Fox get it wrong.)
>"Middle America" seems to know that it wasn't investment bankers that gave govt money to banks.
Then they're not very well educated because that's exactly who it was. Did you miss Paulson and co coming over from Wall street right into the White house saying the world was going to end if we didn't bail out these bankers?
I really doubt that most people know this. I've had to explain this to many red-state folks. Actually, I've had to explain it to a lot of blue-state folks too. And draw a comparison to the RTC in the 80s.
Conclusion: not many people have a clue about this.
I'm going to disagree with you in part, and agree with you in part. I agree with you that this is theatre, but I disagree in that I claim these fines to be trivial to the size corporations involved. By making the fines look "large" to members of the public, the public will hopefully be disuaded into pushing Congress to make real, significant, and meaningful changes to our corporate landscape.
The part I'm disagreeing with is that the criminal misdeeds of the financial institutions are so enormous that even with these "power-upped" fines, the fines are a trivial mosquito bite to the companies.
The SEC is routinely in bed with the financial institutions that they regulate and I see these fines as a corrupt action that fines the institutions less than 1% of the damage the institutions did to the US, and then exempt the institution from further civil and criminal penalties. This is exactly like the "fifty states attorney general" settlement with the banks is doing.
So I take it you're placing the blame with the SEC, and not the notion of financial regulations in general? I think a lot of people do believe that the financial sector has a lot to answer for that it still hasn't answered since 2008. The SEC does seem to be taking advantage of that by implying that an us vs. them situation exists between it and the financial sector.
That being said, if the SEC believes that stiffer penalties need to be put in place because the leadership there honestly believes that the financial system is out of control, is that really so bad? So what if it's in the context of a press hit? Isn't that how organizations all talk to the public today, anyway?
I do agree with you that judicial oversight is most certainly necessary. If you get a traffic ticket you can take it to a traffic court, even. Why should it be so different in the case of securities violations?
if the SEC believes that stiffer penalties need to be put in place because the leadership there honestly believes that the financial system is out of control, is that really so bad?
On face value that wouldn't seem bad, but I'm personally not interested in exploring that case, because as it stands the SEC doesn't seem to believe that the financial system is out of control. If they did do so, they would make use of the tools they already have.
Take a look at the case SEC v. Citygroup, the judge refused a Consent Judgement and the opinion outlines the ways in which the SEC's is really dropping the ball with the authority they do have, and just giving City a slap on the wrist, it even goes as far as to say that:
As for common experience, a consent judgment that does not involve any admissions [of wrongdoing on the part of Citygroup] and that results in only very modest penalties is just as frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies. This, indeed, is Citigroup's position in this very case
As little as admission of wrongdoing (or taking this to go to court and City losing) would make it possible for those people wronged by Citygroup to peruse them in civil court (they technically always could, but read the opinion to see why it makes a huge difference). If the S.E.C cared about getting the financial system under control, this would be an easy step for them to take.
Also, they're looking to be able to impose their new fines without judicial review which is completely different issue from the size of the fines.
Everything I've heard about fines suggests that it's been a great business deal for the banks, they get to put a whole lot of alleged fraud behind them for a pittance compared to the money they pulled in before the crash.
As far as PR and lobbying, I think it's pretty clear that the SEC's outgunned. I'm not approving of the job they're doing by a longshot, but as far as sucking money out of the system they're nothing compared to the banks themselves.
I've heard the fines as a couple billion spread across the industry. They pulled in way more than that during the fraud-ridden crisis, then got bailed out and stuck counterparties (AIG) with a lot of the losses. It's probably less if you need me to prosecute and convict each individual fraud case to add up a total.
The same is true for pretty much any profitable industry. I'm sure the profits made by the medical or technology industry are vastly larger than the fines/penalties those industries paid for fraud. So what?
The right comparison to make is gains vs losses due to fraud. Take ABACUS as an example. According to the SEC GS lost $70m when they committed against themselves, and paid another $500m in fines for a total loss of $570m.
I don't know what world you live in where losing $570m is a "great business deal".
I'm saying that fraud was systemic during the prelude to the crash as the banks scrambled to unload as many of these CDOs as possible, however possible. It'd be near impossible to add up every single case of fraud and bicker over which is really fraud and which is only sort of dishonest, but they definitely unloaded a lot more CDOs than 570 million on their unsuspecting clients.
If that's all that happened, there wouldn't be any investigation. You know the allegations, you know how much money is at stake. Apply your own fudge factor, mine says they're doing just fine, and if they weren't, they'd call up Geithner and Rubin and it would become fine.
If that's all that happened, there wouldn't be any investigation.
WOW!!!!
Maybe you didn't mean it the way it sounds. But the way I'm reading this, you seem to be saying, "there's no reason for a trial. If you were innocent, the police wouldn't have arrested you". Saying that is a great way to get out jury duty, but it's no way to run a judicial system.
The SEC's fines have about as much to do with preventing a financial meltdown as local police traffic fines have to do with preventing a murder. It's just safety theater.
I read the ruling on the Citygroup case you mentioned (I linked to the opinion elsewhere in this thread for anyone interested), it seems like the way the SEC chooses to issue the fines is the bigger contributor to their ineffectiveness than the fines themselves.
I do agree that after-the-fact fines won't necessarily fix anything, and even if they do function as a deterrent their effect does have bounds, but to me it looks like the SEC is more interested in slapping banks on the wrist than actually carrying out their mission. They could cause more punishment to come to the banks then they do now, so I am confused as to why they would possibly want to be able to impose bigger fines. The way I see it, it seems to be all about running around the judiciary and nothing about the size of the fines.
As long as you also include labor unions. Many people want laws that only effect corporations, when labor unions are pretty much the same thing, have just as much power, and can be just as corrupt.
I'll grant unions are very corrupt, but there's no way I believe they have just as much power. I'll believe that when top execs at labor unions pull in as much money as public company CEOs.
> there's no way I believe they have just as much power. I'll believe that when top execs at labor unions pull in as much money as public company CEOs.
It seems silly to equate organization "power" with "how much does the top guy make".
For example, Obama makes less than the president of GM. (Heck - Obama makes less than the president of the UAW.)
While I agree that corporations have a lot more money than unions, the presidents of many large unions make about as much in cash compensation (vs. equity) as most small to medium public company CEOs -- $200-500k.
I'm not sure what this is supposed to prove. Say you're the CEO of one of these companies and you are absolutely convinced that you don't want any of your employees doing any of this stuff. How do you actually accomplish that?
You can never do this 100% reliably, but depending on how important it is to you, there are measures that can be taken.
To go to the complete extreme, you could employ someone to shadow every one of your current employees, and report to you if they break any of these rules.
At the other extreme, you could issue a memo saying "Don't let me catch you doing any of this stuff, which will make you more profitable and earn you a bigger bonus, hint hint."
In between turning a blind eye and adding ridiculous amounts of oversight, the CEO can make very clear what is and what isn't acceptable, what the penalties are for employees who break these rules. S/he can also instigate appropriate oversight to make it more likely to catch offenders.
Like I said at the start, this can never be 100% reliable, but it can cut down the rate of offence a lot.
[edit] tl;dr : If it is important enough to you, you'll find a way to ensure it doesn't happen.
I think it probably just boils down to keeping a paper trail and policies to employees explicitly stating that such behavior will make you criminally and civilly liable. When a violation occurs, throw the malefactors under the bus like and go on about your business.
The political class bought votes with so much borrowed money that they finally could not repay, now they want us to blame the people who give them the money. Like the alcoholic who blames the bar tender for his car crashes.
The SEC's fines have about as much to do with preventing a financial meltdown as local police traffic fines have to do with preventing a murder. It's just safety theater.
That is, everyone is familiar with the local/state government phenomenon of cops who ticket to make quota at the end of the month. Whether you are "breaking the law" today depends in large part on whether state/local government needs to make money off you. Tickets for expired registration are profit centers, robbery investigations are cost centers.
The federal government is subject to many of the same dynamics, except that it isn't called on the carpet in the same way because federal agencies can intimidate those with knowledge of the situation into silence. Once in a while data comes out on the corruption and malfeasance of (e.g.) FDA[3] or EPA[4] or SEC[5] bureaucrats, but for the most part they have the guns so they are dishing out the punishment.
The NYT's role in all this is to act as stenographer. There is no summary of how much the SEC sought to earn in fines from pursuing these prosecutions, nor how many of them were overturned or thrown out of court.
[0] http://dealbook.nytimes.com/2011/12/05/s-e-c-seeks-more-powe...
[1] http://www.paulgraham.com/submarine.html
[2] http://www.sec.gov/news/press.shtml
[3] http://www.washingtonpost.com/business/economy/fda-chemist-p...
[4] http://epw.senate.gov/public/index.cfm?FuseAction=Minority.B...
[5] http://abcnews.go.com/GMA/sec-pornography-employees-spent-ho...