
Nobel Prize Winner Joseph Stiglitz Calls for Jail Time for Corporate Crooks - lotusleaf1987
http://www.dailyfinance.com/story/investing/joseph-stiglitz-corporate-crooks-to-jail/19684353/
======
DevX101
We need to separate two types of leaders that often get conflated when talking
about "corporate greed".

There are: 1) CEOs that explicity break the law. Examples include Mozilo of
Countrywide who insider traded, or deliberately misinformed investors through
investor calls or financial reports. These guys should go to jail AND pay
heavy financial penalties.

Then there are 2) CEOs/traders that made legal but unwise all-in bets. This is
pretty much much of the leadership from banks in the most recent crash. These
leaders should NOT go to jail, as they have not broken any laws. But they and
their companies should be held financially liable for any big losses when they
inevitably come. Investment banks have been pretty successful at taking their
hefty cut of the pie when times are good, but dodging the bullet when bad
times inevitably come. JPMorgan (and other banks) have divisions that do
investments for pension funds. When times are good, they get their share, but
recent losses were completely offloaded onto the city pension funds.
Privatization of profits, socialization of losses. Under this scheme, it's
actually economically rational for them to make wild bets. They need to feel
the pain when those bets don't pan out.

------
DevX101
Rob a liquor store for $40 bucks and get sent away to prison for 5 or more
years.

Rob homeowners and investors, like Mozilo of Countrywide Financial, and
collect a $140M+ paycheck and the SEC gives you the biggest fine ever of
....drumroll...$67M, $40M of which is going to be paid for on your behalf by
Bank of America.

This is roughly the equivalent of law enforcement telling the liquor store
robber to pay back $7bucks and we'll call it even.

------
SkyMarshal
The Savings & Loan scandal in the early 80s sent hundreds of financiers to
jail and almost ended John McCain's political career.

The current fraud-ridden crisis has damaged both the economy and government
much worse, but has only seen a few show-trials like Bernie Madoff. Moral
Hazard is all but non-existent, Wall Street is laughing behind closed doors,
the US Government is their mark/whale now.

Lawrence Lessig has a good TED talk linking problems like this and others to
the influence of money and revolving doors in Washington:

[http://www.fixcongressfirst.org/blog/entry/lawrence-
lessigs-...](http://www.fixcongressfirst.org/blog/entry/lawrence-lessigs-new-
ted-talk/)

Edit: Direct link to the video - <http://blip.tv/file/4266077>

~~~
iron_ball
People have short memories, though. McCain was one of the Keating Five, yeah,
but he was also a candidate for President of the United States of America. As
you say, there's no reason to think that the key figures in the Great
Recession will endure any lasting stigma either. American capitalism admires
grand failure; this is a blessing and a curse.

~~~
SkyMarshal
I'd say the people who admire grand failure only admire it when they're not
negatively impacted by it. For example, tech startups vs Wall Street. There's
a difference between grand failure in fields where the expected payoff is
asymmetrically positive, like the former, and asymmetrically negative, like
the latter.

Failures in the former may cost their investors their investment, but it won't
cost them more money than they've ever made, or put them into the red so deep
as to destroy their whole industry, or bring down the global financial system.
While both sides play the odds and spread their bets, the nature of risk and
payoff is very different.

Also, startups represent an attempt at creating real wealth where none was
before - combining labor, capital, innovation, and raw materials to make
products that can be sold for more than the sum of their inputs, or services
that save time. Alot of what caused the financial crisis was more akin to
gambling, despite protestations of 'financial innovation' to the contrary.
Failure in the former is admirable, the latter not so much.

------
jedwhite
This is so dangerous. The problem is you end up with cultures like Australia
and Great Britain where corporate failure becomes a crime.

In Australia, when you say the word entrepreneur, people think of corporate
crooks (Bond, Skase, Adler).

Legitimate entrepreneurs who failed, like Jodee Rich with One.Tel, get
labelled as crooks.

So failure gets stigmatized. So startups become the insanity option. And the
entire country gets held back and relies on digging dirt out of the ground and
flogging it to China with no added value. Because only big established
industries with government sponsored franchises and monopolies are
"respectable".

Disaster. Don't let a few minority cases pervert America's strength. You don't
want to take on a risk averse, "entrepreneurs and company directors are scam
artists" culture.

~~~
electromagnetic
Corporations can be charged with crimes, anywhere. What this is suggesting is
that the CEO's actually be held accountable.

Yes incorporation protects you from the fiscal results of your actions - the
loss of your company should be enough of a punishment for 99% of business
owners who fuck up through negligence or greed. However, when you're
purposefully embezzling, tax evading and outright breaking moral, ethical and
legal codes, then there should be a nice concrete cell waiting for you.

If you think fiscal immunity equates to legal and moral immunity, then you
have a very distorted view of the world.

You'll go away for years for a non-violent mugging, but when you embezzle
millions into offshore accounts you're given a slap on the wrist and allowed
to leave the country to live in the Bahamas and not even attempt to pay your
debt to the people you robbed blind.

------
pmichaud
Jail Time is a nice rallying call, but his real point is that the incentives
are perverse for the leaders of corporations. Jail time may or may not realign
incentives. I doubt it would --we need much a deeper, systemic overhaul to
really realign the incentives of corporations and society at large.

------
T_S_
Revenge is satisfying, but misguided, because most people assume that is
enough. Criminalizing business will mean that only crooks will want to run
businesses.

Instead, most problems of this sort can be prevented in the first place by
full transparency. Put the books and records of financial companies on the
web, continuously updated, and you won't see as much bad behavior. Of course,
this is nothing like our current system and would make most business leaders
howl in protest, since they would not know how to "add value" in such a world.

~~~
rauljara
"Criminalizing business will mean that only crooks will want to run
businesses."

What an absurd sentiment. We already have corporations that brazenly break
laws with the understanding that the penalties they suffer will be less than
the profits they take. The motivation behind giving already illegal actions
real penalties is to actually prevent said illegal actions, which our current
system fails to. Revenge needn't be a consideration. We already have crooks
running businesses. By penalizing crooks we might actually give honest
business people a fair chance.

~~~
oiuytgfrgh
So who exactly goes to jail?

Put it in simple terms, a garage working on your car's brakes screws up.

Do you jail the mechanic that worked on the car?

Or the service manager that told him to hurry up?

Or the middle manager that set the targets for the service time?

Or the CEO of the service division?

Or the CEO of the car company?

Or the CEO of the pension fund that is the main owner of the company - and so
the one that benefited from saving money on your service?

Corporate manslaughter was introduced in europe after a ferry sinking where a
ferry left port with the bow doors open. The captain was the only one charged
- but he claimed the company ordered captains to close the doors while at sea
to save time in port. Under the old health and safety law the managers who
gave the orders couldn't be punished since they weren't present

Naturally the only people to have been prosecuted aren't the managers of major
industrial accidents - it was a single plumber that fitted a faulty boiler.

------
lkrubner
At least in the USA, since the 60s/70s, the tendency has been toward
increasing the penalties for any imaginable crime: murder, rape, smoking pot,
misstating income, jumping a turnstile when trying to get on a subway - all of
these have seen increasing penalties. (For 1st degree murder, the death
penalty was reinstated.) The penalties against drugs were increased to the
point that the majority of people now being held prison are held for non-
violent crimes.

The trend toward heavier penalties has effected business, and will effect it
more so in the future.

Some people find it satisfying to think that criminals will have to face
severe penalties, but past a certain point, the law becomes so punitive that
rational people will be afraid to take leadership roles, fearing the legal
consequences that they may have to face as leaders.

The article says:

"An institutionalized system of skewed incentives allowed Wall Street bankers
and other corporate executives to gamble with America's wealth and then get
away largely scot-free after the house of cards came tumbling down, plunging
the U.S. into the worst economic crisis in decades and destroying trillions of
dollars of wealth worldwide."

Tolerance of failure is the first pre-requisite of a dynamic economy. Imagine
the kind of laws that would be required to punish every business person who
takes large gambles with credit and then fails - I think you would have to say
goodbye to the culture of startups that now exists in the USA. Most
entrepreneurs take large risks, and most fail during their first attempt at a
startup.

The implication of Joseph Stiglitz's words is that we should do away with the
"limited liability" of the modern corporation. Instead, when corporate
officiers gamble with credit and fail, Stiglitz suggests that they face jail
time. Certainly, getting rid of limited liability would be in keeping with the
trend towards greater and greater punishments. What is limited liability but
an impediment to inflicting punishment on people who have gambled and failed?
But think this through to the end: do we want to go back to the system we had
in the early 1800s, before limited liability was introduced? Do we want to
bring back debtors prisons, and all the other awful punishments that once kept
the economy semi-frozen? Limited liability has been part of the extraordinary
economic dynamism that the world economy has seen over the last 150 years.

Tolerance of mistakes, failures and screw-ups is essential to a dynamic
economy.

If you have any friends who have attempted to launch a startup, ask yourself
under what circumstances you think your friends should go to jail. If they
gamble with credit and fail, and go bankrupt, should they go to jail? In other
words, if they act like a normal startup, should they go to jail? Certainly,
their bankruptcy will harm others - the money came from somewhere, after all.
Shouldn't they be punished for doing harm to others? I get the reasoning that
might lead some to say that such failures should be punished, but please
realize the end result will probably be a stifling of innovation.

This issue has come up on Hacker News before, and I've written my thoughts
about it before:

[http://www.teamlalala.com/blog/2009/12/24/laws-such-as-
sarba...](http://www.teamlalala.com/blog/2009/12/24/laws-such-as-sarbanes-
oxley-with-punitive-measures-for-business-officers-will-probably-stifle-
innovation/)

~~~
lotusleaf1987
Stigletz isn't suggested we should punish failure with prison. He is saying
the penalties need to be enough to discourage deceptive practices that
encourage corporations to break the law because that's what's best for
business:

"the financial industry was engaged in predatory lending practices, deceptive
practices. They were optimizing not on producing mortgages that were good for
the American families but in maximizing fees."

Meanwhile, stock-based compensation created further skewed incentives by
encouraging executives to pursue short-term stock gains at the expense of
long-term corporate sustainablity, Stiglitz said, and in some cases encouraged
them to deceive their own shareholders."

We're not talking about punishing failure, we're talking about punishing
crime:

Stiglitz explained, the system of penalties generally meant a small fine
relative to the full ill-gotten gains, often in the hundreds of millions of
dollars.

~~~
lkrubner
Fraud has always been criminal. Stiglitz wants to take a new category of
behavior and elevate it to the level of a serious crime.

And think about this:

"They were optimizing not on producing mortgages that were good for the
American families but in maximizing fees."

I can think of a lot of incentives that might be put in place to help align
the interests of those writing the mortgages and those who are receiving the
mortgages, however, jail time would not be on my list. We can have a rich and
interesting conversation about what incentives might be effective. We can have
a rich and interesting conversation about what incentives set up skewed
motives that lead to anti-social behavior. But jail time should never come
into the conversation.

Killing off innovation in the USA could be easy, just introduce jail time into
a conversation about what incentives might motivate the business community to
be socially responsible.

~~~
slantyyz
_what incentives might motivate the business community to be socially
responsible._

I don't disagree with the spirit of what you're saying, but people and
businesses are naturally inclined to game whatever rules and regulations are
in place if it means maximizing revenue.

While jail time may not be the answer, I do think a stick _might_ be more
effective than a carrot.

~~~
lkrubner
I am curious how far you want to go with the idea that a stick is more
effective than a carrot. Do you feel that economies where the bulk of economic
activity is organized via free actors engage in voluntary exchange tend to be
more dynamic than economies where the government plays the major role in
organizing economic activity? If not, on what basis would you justify allowing
the existence of non-governmental economic activity?

~~~
slantyyz
I carefully used the word "might" because this is clearly a complex issue, and
I'm no economist.

As someone who would otherwise be classified as "pro-business", I have found
myself more and more dismayed by the bad behaviour of the largest corporations
and their influence on the government.

A corporation is a legal entity with rights equal to a human, but in an Animal
Farm kind of way. Their influence over governments and lawmaking make them
"more equal" than Joe Q. Public. I would like to see checks and balance to
keep the most flagrant corporate/financial bad behaviour under control.

~~~
lkrubner
" I have found myself more and more dismayed by the bad behaviour of the
largest corporations and their influence on the government."

Me too. That's not the issue. The issue is why anyone would suggest jail.
There is a large range of actions that could be pursued to modify the
incentives that lead people to make reckless gambles with credit. Why not
pursue those other actions first? Why not change the financial incentives? Why
resort to jail?

~~~
slantyyz
I didn't suggest jail. I only suggested a stick. That stick could be in the
form of fines or other financial sanctions.

~~~
lkrubner
Yes, that's what I said. There are many, many changes that could be made to
the system that would change the incentives that motivate the people in the
financial industry, and by changing the incentives we could expect that their
behavior would alter. None of which requires jail. Larger fines should be
enough to greatly change the incentives.

------
marze
And why not?

~~~
webXL
Because the government and consumer are just as culpable. Fannie and Freddie
bought any loan a bank generated. They didn't care about the borrowers ability
to pay back the loan! It's inexcusable that a Nobel laureate ignores this
fact. It's like blaming the drug dealer for the existence of the drug. No,
there are two other parties involved. It's no coincidence that there are huge
price distortions in that market either. People who think they know what's
best for us telling us it's the "American dream" to own a house and drugs are
bad (mmm kay?) are screwing up the market, and freedom.

Artificially low interest rates attracted people that otherwise wouldn't be
able to afford a house. Laxed lending standards turned a blind eye to the
credit worthiness of borrowers. Land use restrictions limited supply and tax
credits drove up demand.

Big banking and big government created the big bubble and big recession. And
they're still rolling in the dough:
[http://blogs.law.harvard.edu/philg/2009/10/17/how-wall-
stree...](http://blogs.law.harvard.edu/philg/2009/10/17/how-wall-street-is-
making-its-billions/) (devaluing our money in the process)

Vote out people like Dodd and Frank (and any republican who supports fiddling
with the market - subsidies). Have the wealthy bankers who made their fortunes
off of this bubble help those responsible people who are in danger of losing
their homes.

~~~
marze
William K. Black, professor at the University of Missouri (and the senior
regulator investigating the savings and loan crisis of the 1980s) said:

"This is a crisis that we know empirically involved million of fraudulent
mortgages being made. We know that the losses are out there. We know that the
industry extorted FASB to gimmick the accounting rules, so they didn't have to
recognize the losses. We know that the Fed has huge positions as collateral in
these fraudulent mortgages. We've seen the Fed, Ambac, Fannie, Freddie, Pimco,
Blackrock -- all putting back after investigating tens of billions of dollars
of mortgages, and saying, these were sold under false representations and
warranties -- frauds, and absolutely no one has gone to jail for it."

and

"And the problem is we have zero criminal referrals out of most of the
regulatory agencies. In comparison in the savings and loan debacle again -
maybe 1/40th of the size -- we had thousands of criminal referrals , we got
over a thousand priority felony convictions of the elites - these are not the
little tellers, the vice presidents -- these are the top people at the savings
and loans. There are NONE now. The regulators have to serve as the sherpas to
have successful criminal prosecution. We've got to do the heavy lifting, and
we have to do the guide function, because the FBI can't possibly do this on
its own.

Next thing that has to be done - the FBI formed a partnership with the
Mortgage Bankers Association -- that's the trade association of the perps."

~~~
webXL
"these were sold under false representations and warranties -- frauds"

Including the fraud politicians put on the American people: everyone should
own a house, which came in the form of artificially low interest rates, laxed
lending standards, and tax credits.

Here's what I have to say to investors of mortgage-backed securities,
including Fannie & Freddie: caveat emptor. The ultimate buyer was the U.S.
taxpayer, because those investors knew Fannie & Freddie forays into subprime
were covered, why shouldn't theirs be? It's the American Dream, right? And
sure enough, they got their bailout, aptly named TARP!

We all got TARPed!

------
lionhearted
I agree. And why stop there? Let's throw politicians and activists and
bureaucrats in jail too. Lobbyists, definitely. Lawyers? Definitely.

Hey, maybe we can kick the whole thing off by throwing economists in jail.

Edit: The point is, Stiglitz is saying let's penalize people for taking ill-
gotten gains when things are riding high, and cashing out when things get low.
This isn't just a business problem - politicians, activists, bureaucrats,
lobbyists, lawyers, and yes, economists all do the same thing. No one
seriously suggests clawing back or punishing a politician for making false
promises or screwing up the economy, nor anything like that when an economist
gets it wrong.

