Whenever a megacorporation decides to act like a total shitburger, we are told their executive team has no choice, they are compelled by law to act like total shitburgers if it maximizes shareholder value. Keep workers part time to avoid giving benefits? Fiduciary duty. Export jobs to countries with no environmental or labor protections? Fiduciary duty. Charge customers a daily overdraft fee when an undeclared fee for checking their balance from a foreign ATM puts them in the red? Fiduciary duty. Lobby to change laws so they can act like even bigger shitburgers, legally? Fiduciary duty. Don't judge them, we are told, they have no choice. They are not bad people, they are just bound by fiduciary duty to maximize shareholder value. You should feel sorry for them, really.
And then a complex, perhaps admittedly fraudulent scheme (the mortgage crisis) comes along and kills giant megacorporations, wiping out shareholder value entirely. Any WAMU shareholders in the audience? What happened to this fiduciary duty? What happened to these terrible consequences which would arise if shareholders were not appeased? Shareholder value has been minimized ... and nothing happened.
Wall Street wants it both ways. A bailout with bonuses. Reward with no risk. License to act like a shitburger.
Fine, don't prosecute people for bad decisions. But don't pretend like you have no choice but to act like a shitburger, that doing so is anything but screwing the rest of us for personal gain.
> Are U.S companies legally obligated to maximize profits for shareholders?
> Not directly, but often conditions surrounding corporations lead to this obligation
As long as we continue to not call them out on their bullshit, they'll keep singing.
Yes, there was/is blame to be placed at the feet of corporations. That is probably undeniable. However, it is important to understand root causes here. The truth is hard to stomach for anyone who pro-big-government. The single gating element or decision that opened the doors to what would become the financial meltdown of the century was the US government's decision that everyone should be able to buy a house. Facts and qualifications be damned. Congress wanted everyone to buy a home. So, they loosened all the controls and actually pushed Fannie Mae and Freddie Mac to facilitate lending. It was: Go! Go! Go!
That, and that alone, enabled what followed. Without this gate being opened it would have been imposiible. --as in absolutley fucking no-way impossible-- for masses of bullshit mortgages to be issued and CDO's to follow.
Blame executives all you want for playing within the framework given to them by legislators but, please, be sure to take to task the true monsters who got us here.
BTW, this is not partisan. Both sides of the isle have blood on their hands on this one.
EDIT: My guess as to why nobody has been prosecuted is that a lot of politicians would be exposed through these actions. And, of course, they want to be as far removed from that kind of exposure as possible. The truth is not what they are after. They want votes. None of this would gain them votes and, in fact, might land some of them on the street or in jail.
Nope. That's not what I am saying.
I am saying that government is usually an ass trying to control things it does not understand. If we are lucky the collateral damage is absorbable without much pain. Every so often the consequences of their attempts at central control go off the rails and things get really ugly. This was one monumental case.
This wasn't about government regulating less but rather about government actively driving an agenda: reason be damned, everyone ought to be able to obtain a mortgage to buy a house.
That's how you got people making $35K per year buying homes for $500K with no down payment and no income verification. They enabled something unthinkably stupid.
Now, let's look at the same situation without any government regulation at all. In other words, the government does not create any mechanisms through which a lender is coerced to lend money to those not able to repay it.
And, let's make it personal. Let's say you are the lender. You have a million dollars. You'd like to make money by lending it to people who will use it to buy homes. You get to charge interest. Over thirty years you'll earn a profit if all goes well. This means that everyone pays you on time and everyone pays off their loans.
Two people come to you for money.
The first makes $120K a year, has an advanced university degree and has been working in the same industry and job for ten years with a history of advancement. She also has very low personal debt, credit cards are paid off every month and her car is fully paid.
The second is a guy who works at a fast food joint. Didn't go to college. Makes $35K per year. Has never worked anywhere longer than a year. Has credit card debt and a car loan.
Both come to you to buy the same $500K home. The first person has also saved $100K for a down payment and only needs $400K. The second has no money and needs you to finance 100% of the home or $500K.
Would you lend money to the guy making $35K or the woman with a solid history of responsible behavior as well as a solid earning history?
There is no need to pull out a calculator to figure this one out. Nobody with barely two functioning neurons would loan the $35K guy a dime. Not one lender. That's what would happen in a free market devoid of government manipulation.
What would happen if government decides that everyone must be able to buy a home? Let's say they create a set of organizations that will actually guarantee loans up to a certain amount so as to artificially remove risk? And, let's also imagine that they create a mechanism through which lenders are also able to package-up loans, slice up these packages and sell them to each other, even to investors.
What would you do then? Well, that's a different situation. You are in business to make money. Now government has removed nearly all risk from the equation. Now Mr. fast-food worker who couldn't possibly even imagine in any prior scenario being able to afford a half million dollar home is given a loan. In order to make this loan "pass" we make it interest only, reduce the interest to damn-near zero for five years and require no down payment nor income verification.
Off go millions of people who should have never been able to purchase homes and, playing along, jump into these ridiculous homes. The market goes insane. Home prices take off. They quickly more than double in price. They quadruple in price. You have people buying million dollar homes. The whole thing is absolutely insane.
Now, you, the lender, are not stupid. You understand mathematics, statistics and market forces far better than the senators and representatives that popped the cork to let out the genie. You know this is a huge house of cards. But, hey, Congress actually WANTS YOU to do this and they fully support it.
Any bank who does not play along stands to die because there is absolutely no way to close normal loans with normal metrics. The market is so inflated that all but a few people are simply not qualified to buy homes. Whole neighborhoods go from $150K homes to the same homes being priced at $700K. Salaries don't keep pace with home price inflation, therefore, as prices skyrocket, the only way a bank can make loans is to play along or else shut-down their lending business. For most banks that's where the make their money. Everyone plays along.
Now, of course, banks have to mitigate risk. This is where the CDO  (Collateralized Debt Obligation) comes into play. They know this whole thing is a huge house of cards that is going to explode and crumble. The CDO mechanism allows them to package-up mortgages, slice them up and trade them as investments. There are also new mechanism that actually allow others to buy insurance against credit packages defaulting (in other words, if loans go bad). A few people realize this before others and buy these CDS's (Credit Default Swaps)  ahead of the bubble popping and stand to make a ton of money as a result.
Now lenders can write loans as fast as they can push out CDO's. The system is so convoluted and complex that nobody knows what the hell is going on or when the music will stop. People are going insane, "buying" homes they can't possibly afford and also engaging in the dangerous-but-lucrative game of flipping real estate. The pressure cooker has no relief valve. It's only option is to explode.
And it did.
It's been a few years since I read a few books  on the subject so the above timeline and details might not be absolutely on point. What is accurate is that nearly 100% of the genesis of the problem was due to government fucking with free markets. They just don't know what they are doing. Most of them can barely add and subtract, much less understand complex economic and mathematical models. It's a pity we don't have a mechanism to prevent the ignoramus from passing laws that affect massive economies world-wide without first having to prove that they have the scientific background (math, statistics, economics, etc.) to model and understand what they are doing.
We are now seeing a degree of this all over again with Obamacare. The Senate and the House have exempted themselves from living by the same law they are imposing on all of us. The very unions that supported the law are now rioting 'cause someone got out a fucking calculator and figured out what's going on. Large corporations are pressuring, and I understand some have been granted, exceptions. Again, you have a bunch of lawyers and other morons passing laws without understanding what they are doing because, through them they pander to the masses and buy votes.
Blame CEO's if you must, but the playground was created by government meddling. Nobody else can own that part.
People act as if the fact that there was a global financial collapse is proof that someone must have been criminally culpable. But who should be prosecuted for the last dot com bubble bursting? Or the next one?
Re: jail time, I think non-violent crimes should not get jail time period, whether you're a banker or a stoner or a malicious hacker.
The idea that executives were unaware of the vast amount of fraud that was endemic in the mortgage industry is laughable. We even have documentary evidence from people inside who repeatedly raised these issues but were ignored or fired.
I don't doubt that the vast vast majority if these people did actually owe money on their mortgages but if you cannot prove it, the market then gets to sort out those companies who can look after the important things from those who cannot.
the market should winnow out fools and incompetents first, not have them compensated by the courts.
Second, software companies often ship bugs knowing exactly what those bugs are.
Third, bringing a foreclosure lawsuit without the promissory note is not per se fraudulent. It's the homeowners job to raise the defense of asking the mortgage holder to show the document. It's only fraud if you intend to defraud the homeowner by foreclosing on a mortgage you know or suspect you don't own.
companies ship products with know bugs in in a calculated risk that firstly the bugs do not violate laws and contracts, and second the bugs have no market based effect. if a software company ships with those bugs then they display same levels of in ompetant e
and yes the ratio is probably wrong
IIRC the prosecution failed, although they did put the guy through the wringer in the meantime.
You can't prosecute someone on the idea something is laughable. You need some kind of evidence.
It's not illegal to loan money to someone who can't pay it back--which is the bulk of the documentary evidence that I've seen. If a bank knows I faked my income statement but lends me money anyway, that is a bad decision, but it's not criminal fraud (except maybe by me!).
It's not illegal to sell securities that might lose money. It's not illegal to buy securities that might lose money.
It would be criminally fraudulent to materially misrepresent the facts and risks--for example for a bank to say "we verified the income on all these mortgages", or "I guarantee this mortgage backed security will not fail."
But except for a few rare cases, that's not what happened. It was ratings agencies--3rd party companies--who decided to rate some mortgage-backed securities AAA without knowing what was in them. But again, that's not against the law because the ratings agencies are just private companies expressing an opinion.
NOTE - I'm not defending what happened because it was obviously stupid. And I'm not saying that no criminal fraud occurred, because some did.
I'm just an advocate for people understanding what is the actual state of the law, vs. what seems like it "should" be fraud.
Almost everything about the mortgage business is a fraud from one perspective: MERS. I don't have time to find the terse summary, but http://market-ticker.org/akcs-www?post=188061 should give you some idea about what the problem is.
The basic problem: without actually recording a transfer at the county registry, a mortgage cannot be given the preferential security treatment. Almost none of the mortgages sold had their title transfer registered -- this would need to be done every time the mortgage changed hands, and incurs a non trivial cost. Instead, the banks made their own law, created a corporation called MERS, which supposedly owns everything, and acts as an agent of the MERS-registered owner. However, this is not legal - not for foreclosing, not for the IRS, not for the counties.
Congress' way to fix it is to make it retroactively ok for the banks to make their own law. I'm not following closely, so I'm not sure if that has indeed happened - but I am sure that the whole MERS thing is illegal, and that AGs (except perhaps in Louisiana) try to fix it by ignoring it.
tl;dr; the financial crisis happened, here is something unrelated which might be technically illegal. Lets get em!
And that's just one relatively minor aspect of the mortgage business. Everywhere you look, there's significant violations of laws (robosigning, co-mingling of assets) with essentially NO law enforcement interest in finding the responsible parties.
> might be technically illegal. Lets get em!
"Technically" illegal? At the very least, they defrauded counties on registration fees (adding up to a few hundred of millions, perhaps billions).
More like "an alternate mortgage registry that has allowed entities to initiate foreclosures even if they don't hold the mortgages".
People tend to think it's wrong that a corporation can play fast-and-loose with their money, and then fuck up royally get government bailouts and generally speaking keep on like nothing happened.
I honestly don't know enough about these institutions and relevant financial laws to know what, if anything, could be done as punishment/retribution/revenge but then again I don't feel like anything was done. Therein lies the problem, a group of people can sink the economy through risky/reckless practices and skip out of it while the common folk lose their jobs/homes/savings and that just feels wrong. At the very least, it feels like a lack of rule of law.
Do you honestly think your bank is responsible for your economic well-being? Or that bankers are responsible for every economically bad thing that happens?
Also: you don't feeeel that anything was done. So what? Feelings are misleading. Angsty teenagers often don't feeeel their parents love them, no matter how much they actually might. I didn't feeeel like getting up to go to work this morning, but I sucked it up and went anyway.
If our country were governed by feeeelings we'd in a deep, deep hole.
And yes, Our country is governed by feelings and we are in a deep hole. If a member of the legislature feels we need a law for something, they will try to create one. They represent, or are at least supposed to, the collective interests (feelings) or their constituents.
And what is with the extra "e"s every time you spell "feel". I don't know if you intended it, but that most certainly reads to be very patronizing.
The causes of the financial collapse, on the other hand, are systemic and amorphous. Lots of things had to go wrong at the same time for it to happen. People selling mortgages were not checking to see if people could pay, people where buying houses they couldn't afford, Wall Street sold mortgage-backed securities knowing both of the above. If any of these groups had acted differently, the collapse wouldn't have happened. Why should bankers be the ones to get put in jail? Because we don't like them?
> Wall Street sold mortgage-backed securities knowing both of the above
Sounds like negligence then?
These people in my view were negligent at their jobs. They chose a career which contained an inherent level of responsibility to society which they didn't live up to. The justice people are seeking is social justice, not perhaps prison time but more repayment of their ill gotten bonuses.
The fact is, they're not in jail because nobody was committed enough to prosecuting them, and because the criminals are simply too powerful and influential, and have utterly co-opted elite opinion and the institutions meant to keep them in check.
Look at the Savings & Loans crisis - how many white collar criminals got sentences? How much bigger was this financial crisis? Just do the math (or read up on William K Black, a prosecutor who actually prosecuted, back in the day.)
Comparing the latest crisis to the S&L crisis is comparing apples and oranges. First, most of the ~900 people convicted back then were not high level execs, but loan officers, branch managers and the like. Second, the frauds in those cases were much easier to prove. There was a lot of individual fraud and insider trading. It's easy to make a case to a jury that someone should go to jail for making up fictitious borrowers or trading on an inside tip. But look at the REPO 105 example someone mentioned above. You want to explain to a jury why someone should go to jail for treating a repurchase transaction as a sale instead of a loan, on advice from accountants? Third there was the practical ramifications arising from the fact that this crisis was a much bigger problem than the S&L crisis. The government was preoccupied with saving these institutions to keep the credit markets flowing rather than punishing people for the actions that led to the crisis.
However that also means that "self-regulation" is a get out of jail free card. Which I sort of understand, you would not want to cripple a growing sector with unnecessary constraint, I understand _once_ ( and you may argue, that it was not the first time for the Banking sector to keep only greed as regulation)
So it is fine that nobody went to jail. But we should also acknowledge that this self-regulation has failed in a spectacular fashion. So spectacular that it has had no impact in the life of most bankers, except a delayed bonus for a year. And nothing has been done to change that in the last 5 years.
To put that in perspective it took a decade for the start-up sector to recover from the .Net bubble. A lot of developer from those time have lost money, and struggled to recover their past salary level. The days of setting your own rules in a company just because you are a developer are also gone.
Here is the City of London, nothing has changed for bankers.
Edit: should -> should not
Well, Fred Goodwin lost his knightwood for the allmighty omnishambles at RBS - serious stuff!
[Not long after he was kicked out of RBS I was crossing the road in George Streed Edinburgh and there was a chap sitting in a convertible Ferrari waiting for me to cross and I thought "he looks familiar" - 95% sure it was ex-Sir Fred the Shred]
And you know because you're about to crash it.
This is the crux of the problem. It's very difficult to send someone to jail when they haven't committed a crime, no matter how unpopular they are.
I think most people would regard that as a good thing, personally.
It's worth remembering also that the banks were regulated. Did any regulators lose their jobs?
EDIT/Afterthought: I suppose we could bring back lynching.
When the government does a bailout, there's no acute sense than anyone is suffering too acutely, and therefore there's no need for prosecutions.
Bailing out Enron would have cost less than other recent bailouts.
A business whose failure could jeopardize the entire global economy demands a different standard of responsibility for management than a photo-sharing website. When you're running something that critical, you're at least in part a de facto public servant, even if you're nominally a private businessperson.
It's an awkward position for a CEO to be in, to be sure. But they could always get out of it by scaling down their businesses to a size where they're not a single point of failure for the economic health of billions of people anymore.
Somehow I doubt they will be rushing to do that voluntarily, though.
We need regulators to establish the rules and set the boundaries. The problem is that we have them but they failed to do their job.
It's like sending a man with a rifle to protect a herd of goats from a leap of leopards. If the man decides to go to sleep and the leopards come along and eat some of the goats, who do you blame? Do you blame the leopard for being a leopard or do you blame the man for sleeping on duty?
I think we should pay government regulators like $400,000 a year. That way instead of having the C students from Harvard's class trying to regulate the A students, you can grab some of the A students to pull into the regulatory role.
Say what you like about Dick Fuld but he lost both his job and the majority of his wealth when Lehman Bros went under. Have any banking regulators been even demoted for letting the financial system come to the brink of collapse on their watch?
I do think the transition of the investment firms from partnerships to publicly traded companies was a bad move, but I have no reason to strongly believe it would have stopped the previous financial crisis. Goldman Sachs made a lot of money betting against the bubble, remember.
Lehman wasn't bailed out, while other companies were. There was little rhyme or reason do which companies did and did not get saved. This wasn't necessarily bad, as it seemed that firms had gotten the expectation of a bailout and were continuing their risk-acceptance behaviors, but the collapse of Lehman is generally considered to be the immediate cause of credit drying up nearly instantly for everybody. The rulebook had changed and people snapped from way too risk-accepting to way too risk-averse.
> For what are they being "held accountable"?
For failing to regulate the industry properly.
Basically, it boils down to this: "Hello, Mister Banking Regulator. Don't sit down. See this financial crisis here? The one where the government had to step in and bail out the banks? Well, it happened on your watch. You were supposed to prevent shit like this from happening. You're fired. Close the door behind you."
How much did he actually pay out himself in the end? Mozilo's worth ~$600M according to some quick googling. $67M represents ~10% of his net worth (some of which was gained illicitly). From a risk perspective this looks like a great deal! Cheat yourself up to a big fortune and if you get caught so what? You've made it! So I do think the fine should be on the same order of magnitude as the net worth of the individual to really send a message -- and it should not be tax deductible (if it is for individuals, I believe companies can).
I also think there should be a more serve and general ban from the securities industry.
The line between aggressive business decisions and criminal ones can be a thin one. Financial crimes are in fact a relatively new invention. Did you know that at common law, embezzlement wasn't a crime? It took a long time for the law to come to terms with the idea that there should be anything illegal about doing something with money someone voluntarily gave to you.
The UK is an example where company directors can be prosecuted for corporate mismanagement (failing in fiduciary duties http://legal.practitioner.com/regulation/standards_9_3_6.htm) and there are new offences planned specifically for banking.
But in fact Fred Goodwin received a handsome pay-off and has 24x7 police protection as a result of protestors arriving at his house when details of his huge bonus pay-off became public. He even obtained a super-injunction making it illegal for UK newspapers to reveal he worked as a banker ! (http://en.wikipedia.org/wiki/Fred_Goodwin#Superinjunction)
edit: as someone else pointed out he did lose his knighthood but that hardly seems as severe as prison time.
The reason that CEOs haven't been prosecuted is that it's not clear there's any basis for which there to be a prosecution. There's no law criminalizing CEOs from making bad decisions, and it'd be incredibly stupid for there to be one.
I still occasionally encounter people who think the problem with the housing bubble wasn't that it ever existed, but that it ended.
Well, everyone other than people just trying to buy a house for their family. A house in which to live, not to flip-off in ten years time.
It explores the roles and motives of different players, and pretty convincingly shows how the game is heavily tilted towards Wall Street executives.
The rationale seems quite reasonable up front: something bad happened, we should find out who's responsible for it and punish them. There's also an unspoken assumption that this punishment would be a deterrent to future catastrophes, either by making these people too afraid of the consequences to commit their crimes, or simply by removing them from their positions of power.
This view of justice makes very good sense on the level of an individual. An individual who can be proven beyond a reasonable doubt to have committed a crime is considered responsible for their actions, and it is appropriate to punish them. If their punishment is incarceration, then locking them up for a time arguably makes society safer. Their fate would serve as an example to others of what happens when you commit a crime.
The problem with this view is that the financial crisis was not the result of individual actions on an individual level. What transgressions met the standard of our justice system, namely the rigorous demonstration of concrete, individual crimes, were treated. This article itself says this: those (relatively few) individuals who were demonstrated to have committed actions that were against the law were investigated, tried, and sentenced.
The financial crisis as a whole, however, was a consequence of the structure of a system. Risk was commoditized. Loans were gathered, sliced up, and sold as instruments. Incredible complexity was introduced: witness the explosion of demand for financial engineers specializing in derivatives pricing. Banks sold mortgages with the intention to sell them up the chain as components of complex securities, encouraging them to be lax with their lending standards.
In a way everyone involved was to blame, from the homeowners who filed shoddy-to-fraudulent paperwork, to the loan officers who looked the other way and accepted it. The mistake this and other articles like it make is it attempts to aggregate this blame upward. After all, the thinking goes, it's a manager's responsibility to ensure the proper behavior of those who report to him, and that chain ends at the CEOs. Therefore, the view goes, the CEOs must be held accountable.
Sometimes a more ephemeral, less informed view is at play. The reasoning is that these companies do what their leaders tell them to do, so naturally consequences of the company's actions are consequences of its leaders' actions. In addition, the CEO is a public figure. When we need a human being to personify a company, he's the first that comes to mind.
This is where things break down. To be held responsible for a crime, you personally have to have done something illegal. Not "you should have known better." You have to have broken the law. These people were investigated and even brought to testify before Congress, and no actions were found that met the rigorous requirements to be called a crime. Perhaps it can be argued that they were morally culpable, but as far as the justice system is concerned, their hands are clean. Their actions could not be proven beyond a reasonable doubt to have directly brought about the financial crisis.
Suppose they had been tried and given jail time, as this and other articles demand? In the absence of all other interventions, would that have made the system any more stable? Certainly not. The economic ingredients for another crisis would still be in place. Would their example have served to convince others to behave better? Certainly not. The message would not have been "don't cause financial crises," (whatever that means) but rather, "try not to be at the helm when things go badly." Their incarceration would have served no purpose beyond crowd pleasing.
It's time to give it a rest. You will never see these people prosecuted because by our standards of justice there is nothing to prosecute. If you want to make the financial system more resilient against collapse, you ought to press for structural reform to prevent these unstable situations from occurring again. If you want mob justice, it not happening. Deal with it.
Rewards accumulate upwards, so surely blame should too.
> Would their example have served to convince others to behave better? Certainly not.
I think it would. If CEOs were going to jail then other CEOs would put more of their company's resources into making sure they are running stably and not taking on too much risk. I'm sure none of these people wanted to run their company into the ground, but the rewards outweigh the risks, so bad decisions were made that might not have been if those in charge had had a more cautious approach.
I agree with you that with the current laws there is not a reasonable thing to prosecute these people for. Personally I would like to see laws that could cover these types of things, not just for banks and finance, but for any large organisation that causes human suffering.
Should the CEO of papa john's personally pay every speeding ticket gotten by delivery drivers while out on delivery? Even though company policy clearly states drive within the laws. Should he have a compliance officer go on every delivery to make sure that all driving rules and regulations are followed? And perhaps a second so that we're sure the first isn't colluding with the driver, perhaps a third to break ties when the first two can't agree. At three we probably need a manager to go along to so we can make sure the others aren't slacking off. That's right we need a five man team to make sure a pizza gets delivered correctly and safely.
The CEO of an organization has a large effect on everything, but isn't solely responsible for everything that happens. Blame should only rise as far as the decision to act irresponsibly did. As far as the liar's loans go blame should be on loan officers who didn't do due diligence and as far up the management chain as can be shown to have had knowledge of that fact.
This argument hinges on the idea that the executive is earning rewards that are vastly disproportionate to the risks he faces for making mistakes.
Since the executive is compensated orders of magnitude more than any individual rank and file employee, it's easy to think that his reward is too large. However, on deeper examination you find that this isn't as clear as one might think it is.
Doesn't every employee enjoy the benefits of the company's success? Individually their pay is small compared to the executive's, but taken together their collective reward dwarfs what the executive takes home. When taken in the context of the entire company, the pay of the executive seems more reasonable.
As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business. Morality can and certainly does enter into it, but only in such a capacity where it doesn't interfere too severely with this mission.
When viewed from this angle, it's clear that putting in place laws that would allow you to prosecute CEOs that execute this mission in good faith is foolish. It would be incompatible with our legal principles because it would assume that all leaders of faltering companies are criminals unless proven otherwise, simply by virtue of being at the helm during bad times. Worse, it would transform the role of the CEO from that of the responsibly careful and reasonably bold leader to a timid sheep who lives in fear of mob justice for impossible-to-foresee consequences of his innumerable, seemingly innocent, decisions.
But your argument about executive compensation is rather odd to me. Not every employee enjoy the benefits of the company's success unless you just consider having a job the only benefit to worry over. Since the employees take home pay is collectively larger then the executive pay seems reasonable? I strongly disagree. That's implying that the executive can pay himself a million a year and there's no problem with paying 100,000 employees $100 a year because collectively they get paid more. I think the executive would likely feel that's a great deal for him but I would think the employees would disagree. Granted, extreme example. The simple fact is that in most companies I would expect the collective pay of employees to be larger than the pay of its executives, that shouldn't be a factor at all.
I'm not aware of examples shareholders being involved in the day-to-day decisions that the executive makes. Sure, there's pressure to do this or that, but shareholders tend to just say "make us money". They don't necessarily so how it should be done. That doesn't excuse the executive's decision if it goes bad.
As for "foolish" laws that could imprison CEOs for bad decisions. We actually already have such laws on the books, they just aren't enforced on that level. If you as a person make a bad decision that results in harm to someone else, those laws may hold you accountable. In terms of CEOs making the same exact decision that results in the exact same harm to someone else tends to result in the company being held responsible. Which usually results in a fine of some sort, if anything at all. In most cases where the company causes harm, it was a person's decision that led to that harm. If it can determined that it was the person's decision that led to that harm, you're damn right they should face the consequences of that decision.
Big example. Deepwater Horizon oil spill, several individuals faced criminal charges for decisions made before and after the accident and rightfully so. Why is it a CEO shouldn't face consequences for decisions that they make if it can be shown they were in fact the ones that made them?
As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business.
That is the principal (shareholders/board)'s intended role for the CEO.
But as an agent of the principal, the CEO's incentive is different, it is actually to use his power and influence to manipulate the company into offering him maximum compensation and minimum risk in the short term, and to rig the company's business into taking risks that are degenerate in the long term but boost profits in the short term. And members of the board, who are also CEOs of other companies, are complicit in this because they are helping each other do the same thing--colluding to basically rob each others' companies together.
C-level execs of large banks (the kind of execs in question) DO early disproportionate amounts of money and face no real risks even when they fail miserably. C-level execs typically get golden parachutes and usually face no criminal charges even if their actions or direction lead to criminal behavior.
> Doesn't every employee enjoy the benefits of the company's success?
No, absolutely not. Is it better that someone be employed rather than have no job and go hungry? Yes. But you are wrong if you think the janitors that clean the offices and other low level employees share in the success of the company, these people are paid low, flat wages and are highly expendable even in successful times for a business.
> Individually their pay is small compared to the executive's, but taken together their collective reward dwarfs what the executive takes home.
The average worker does not share their income in some kind of collective way and does not have a way to collectively bargain for extra wages or benefits. C-level executives, on the other hand, have tremendous salaries compared to the average worker working under them and are rarely in danger of any penalty for bad or illegal decisions.
> As for risk, remember that however all-powerful the executive's role is portrayed to be in popular culture, he is ultimately a servant of the shareholders and the employees. He acts according to pressure from the owners of the company to transform an existing business into a more profitable business. Morality can and certainly does enter into it, but only in such a capacity where it doesn't interfere too severely with this mission.
If high level executives get a license to act against moral interests of people at large without the risk of punishment, we should expect sociopathic-like behavior from those person and they will do damage in some capacity or another.
> When viewed from this angle, it's clear that putting in place laws that would allow you to prosecute CEOs that execute this mission in good faith is foolish.
Nonsense. No person or business entity is entitled to profit without rules or regulation. We aren't Ferengi.
> It would be incompatible with our legal principles because it would assume that all leaders of faltering companies are criminals unless proven otherwise, simply by virtue of being at the helm during bad times.
Running a business poorly is not a crime. Running a business with the intent to lie, defraud, and otherwise cheat the law is. Expanding or strengthening laws to ban behavior that is destructive to society is not wrong but is moral and necessary.
> Worse, it would transform the role of the CEO from that of the responsibly careful and reasonably bold leader to a timid sheep who lives in fear of mob justice for impossible-to-foresee consequences of his innumerable, seemingly innocent, decisions.
If this were to happen, society would be a better place. Instead now we have not sheep but wolves that seek their own profit regardless of how many lives are destroyed.
I understand entirely why you object to the article's tone, but perhaps "Nobody's in jail for this, and it pisses us off, but it's not tenable to put people in jail for this so let's look at other options" is the perfect message for people who don't already understand what you're saying.
Come on. Is the 2008-09 time period already so distant that we've forgotten that, yes, firms & their CEOs did individually misrepresent/lie/fudge their investments and operations.
Sure there was a "structural" issue like you say, but it was fanned by an orgy of company-specific actions. Some of them, to jog our collective memory:
- The use of 'Repo 105' transactions to conceal $50 billion in loans on Lehman's balance sheet [Source: http://www.accountancyage.com/aa/news/1934026/-sued-lehmans-...]
- A series of obsfuscations to hide the true value of stock options awarded to executives. In one instance Fuld claimed he earned $146 million via stock grants when he actually earned $409.5 million. Also, Fuld made $469 million from stock sales between 2000 and 2008, compared to his claims to have hardly made any money that way. [Source: http://www.businessweek.com/magazine/content/10_19/b41770562...]
- Bank of America hiding $5.8 billion in bonuses it authorized for Merrill Lynch executives before taking over the firm [Source: http://abcnews.go.com/Business/story?id=8240633&page=1]
- Citigroup understating its subprime exposure by $40 billion [Source: http://blogs.wsj.com/deals/2010/07/29/the-secs-citi-complain...]
I could go on.
I'm not arguing for jail time for each of the CEOs of these companies. But in most cases these companies and their executives have gotten off through settlements and fines, paid for by their shareholders.
Which brings me to your strong conclusion:
> You will never see these people prosecuted because by our standards of justice there is nothing to prosecute
I beg to differ. There is TONS of stuff to prosecute. But perhaps, there is no desire or will. Cue, the SEC's Revolving Door: http://www.bloomberg.com/news/2013-08-04/sec-door-spinning-m...
As a background principle, remember that every company takes measures to make its books look good. Accounting isn't a simple mechanical process, and there is quite a bit of leeway in how to classify various things and treat various assets.
Re: Repo 105 transactions. From Cuomo's lawsuit against E&Y: "E&Y not only approved but consistently supported Lehman's Repo 105 policy, and advised Lehman that it could take advantage of a technical accounting rule, known as FAS 140, to treat these Repo 105
transactions, which in reality were short-term financings, as 'sales,' enabling Lehman to remove the securities from inventory on its financial statements until they were repurchased." Here's a description of the Repo 105 transaction: http://www.npr.org/blogs/money/2010/03/repo_105_lehmans_acco.... Essentially, a bond is sold for cash with a short-term agreement to repurchase it. Lehman's accountant signed off on its treating these transactions as sales instead of loans, pursuant to FAS 140 (an accounting standard). This is criminally fraudulent activity?
Re: obfuscations to hide value of stock options. How is this fraudulent? Fraud doesn't just mean lying or misleading. It means basing a transaction on a lie or a misstatement.
Re: hiding bonuses. Again, how is this fraudulent?
Re: the revolving door article, see: http://www.slate.com/blogs/moneybox/2013/07/23/robert_khuzam... ("If you manage to unplug from the revolving door narrative for a second, you can see why this makes sense—if you spend your time as a government lawyer being extremely lackadaisical in your prosecutorial efforts that's going to make you look like a bad lawyer who people don't want to hire. If you want to cash in some day, you want to have the reputation of being someone who's really smart and tough and effective and who understands how to make cases.")
Note that article is by Matthew Yglesias, who is hardly some industry shill.
And btw, Dick Fuld denied having any knowledge of Repo 105 transactions at Lehman, a tool that was used to hide nearly $50 billion on its books. [Source: http://www.zerohedge.com/article/repo-105-scam-how-lehman-fo...]
# And while you are correct that wilfully understating the value of executive stock options by $250 million may not be fraud, it is a lie told to shareholders and regulators. And we can't blame it on "global" or "structural" issues.
# Hiding bonuses is fraudulent when it is done in the context of an acquisition (Bank of America authorized those bonuses to be paid to Merrill Lynch execs, when the financial world was collapsing all around).
# Khuzami wasn't the first or only person who walked through SEC's revolving door, nor will he be the last. Here's a great, comprehensive and data-driven analysis of SEC's Revolving Door by the Project on Government Oversight: http://www.pogo.org/our-work/reports/sec-revolving-door.html
Again, I'm not alleging each of these (or the numerous others just a simple web search will throw up) is fraud, but refuting the parent's suggestion that the financial crisis was "a consequence of the structure of a system"; that there was no individual culpability/actions; and that "by our standards of justice there is nothing to prosecute".
You can't just group him together with the lower layers that start in government and want to cash out in private later. These usually don't come back.
It was global crisis brought on by global creed. And when I say global, I mean capitalist 1st world. Stop scapegoating.
If by this you mean that ignorance is a defense, Sarbanes-Oxley was enacted specifically, in the wake of Enron, to remove this defense. CEOs sign a statement each year attesting that they do know, and they can be prosecuted for lying about it.
From a speech Cynthia Glassman gave:
Recognizing that awareness must precede action, Sarbanes-Oxley and the
Commission’s rules require the CEO and Board to make certain that procedures are in
place to ensure that they hear bad news. Under the Commission’s recently adopted
rules, these procedures must ensure that all material information - both financial and
non-financial – gets to those responsible for reporting it to the investing public.
I guarantee you that if you were to look at the lifestyle of many of those responsible today that we would see that they have plenty of money stashed away, many apartments and homes, club memberships, etc.
I think we would all feel more comfortable that a crisis like this would not happen again if we knew that the practices that led to it were shown to be unprofitable.
Right now, they are actually being incentived to disregard ethics in order to maximize profits.
There were many examples of outright fraud in the years leading up to 2008, some of which are presently being discovered in civil suits.
The perpetuators of these frauds have never been brought to justice. (or even really investigated by the justice dept) The victims of these frauds are still seeking relief.
Many people are frustrated as our supposed functionaries of justice in this country are too cozy by half with those entities they are supposed to be regulating. This is corruption writ large.
Here is just one example of outright fraud:
This is a quote from the document in question:
1003. Specifically, plaintiffs performed an investigation concerning the mortgage loans
purportedly transferred to the trust for the JPMorgan Defendants’ JPMAC 2006-WMC4 offering.
The closing date for this offering was on or about December 20, 2006. Plaintiffs reviewed the
transfer history for 274 loans that were supposed to be timely transferred to this trust. Sixty-six (66)
of the loans were not and have never been transferred to the trust. In addition, several other loans
that were supposed to be transferred to the trust were transferred to entities other than the trust, but
not to the trust. The remainder of the loans (approximately 140) were eventually transferred to the
trust, but all such transfers occurred between 2008 and the present, well beyond the three-month time
period required by the trust documents and far after the three-month period for the trust to maintain
its tax-free REMIC status. In other words, none of the reviewed mortgage loans were timely
transferred to the trust, a 100% failure rate.
not a single one of the surveyed loans in this REMIC was actually deposited into the trust in a timely fashion and over half were never deposited at all
The trust is void under the law. Everyone who paid the servicer of this trust was screwed as the trust didn't legally own the debt it claimed to. Every investor who sold 'certificates' backed by this trust was robbed. These trusts, which don't really legally own the debts they claim too are foreclosing on debt they don't own. This isn't just failing to cross some t's and dot some i's.
Do you agree (if you assume the above to be true) that people should go to jail for this?
Do you think none of the senior execs at JP Morgan Chase knew about this?
Do you think it is acceptable that the neither the SEC, the OCC or the OTS have been looking into these problems?
You seem to think being a member of a group committing a crime absolves the individual actors of culpability? By this measure, many members of organized criminal enterprises aren't doing anything wrong.
Maybe we should actually investigate these crimes and at least try and assign responsibility and have trials? Isn't that what the court system is for?
Shouldn't we be embarrassed by this complete breakdown of the rule of law?
In Iceland at least, they've done something about it!
Speaking of organized crime
and more money laundering
The justice department 'probes' these matters and then issues civil penalties. These are criminal acts and deserve criminal investigations.
I agree that singling out and only blaming CEOs is ridiculous. Far more than just the CEOs of these banks should be in cuffs. Many of these banks should lose their US banking charters and be dissolved as US banking entities.
If you do not punish this behavior, harshly, it will continue. Civil suits are not enough. For this to stop, many people need to go to jail.
The regulators aren't looking; they don't want to throw their friends and future employers in jail.
How can we 'give it a rest' when we haven't even tried to fix the problem?
Secondly, would the crisis could have been prevented if this practice were not in place? Absolutely not. This behavior was a symptom rather than a disease.
Same deal with tax avoidance.
To a major extent, the bigness of these financial institutions is the issue -- the fact that they're so ingrained into our economy as to be deemed untouchable, save for infinitesimal borrowing rates and occasional cash transfusions.
In many cases it's hard to draw clear distinctions between "government" and "finance industry," as some pretty connected foxes were guarding the henhouse before, during, and after the crisis.
Government failed us here, big time, and continues to fail us. But let's not let the culprits off the hook, nonetheless. The reason our government gives this industry a pat on the back, a few trill, and an 'atta-boy every time it fucks up is because this industry has made a concerted effort to buy off the government. And it has.
But some politicians were all "oh no!!! we can't let these banks fail!!! the stock market would collapse and unemployment could spike over 10%." And then the stock market collapsed anyway and unemployment spiked over 10%.
And now the banks are even bigger. :P
Some sort of bailout, unfortunately, needed to happen to keep the world from going completely Mad Max. But the bailout should have come with conditions: new regulations, enforcement with actual teeth, and trust-busting breakups of institutions on the receiving end. None of that happened.
For the record: prosecutions of top execs, while warranted in many cases, are little more than sideshows. They're basically conducted for appearances. They do nothing to stop the next CEOs from going right back to business as usual. What really matter are antitrust policies, regulations, and enforcement.
Edit: if any of you have seen Enron: The Smartest Guys in the Room, the same filmmaker also made a documentary to explore Spitzer's downfall with regard to the financial crisis:
I'm not even a native English speaker and that opening phrase screams sloppy journalism to me.
I guess for some reason I expect a higher quality from established news outlets
It is interesting to see the sentences people got for their crimes. I agree all of those mentioned in the article are wrong, but a death sentence seems incredibly harsh.
The most troubling issue is that there hasn't been any significant adjustments since then. Perhaps not that surprising given the amount of influence the financial industry have in policy making, but still. It's also distressing to see an individual like Larry Summers being nominated as the next Fed Chairman. It seems very little has been learned.
For anyone interested in understanding the events that led to the crisis, I can't recommend highly enough: All the Devils Are Here. Of the many books written on the subject, it provides a very objective and thorough account.
(I know it's not quite that simple. Strangely enough, Martha Stewart used to be a stock broker, so she should know insider trading laws. But still...)
This is someone with expert knowledge who has actually been through and on the inside of a similar, if smaller, situation.
He pointed out that, in that case, they pursued investigations and prosecutions and were able to win settlements and judgments in circa 1000 instances including criminal prosecutions.
As I recall, he described what has happened this time around and a real shortfall and travesty. One that was not necessary, had justice been more aggressively (or, at all) pursued.
I'm not an expert. But this guy, not just through credentials but also experience and demonstrated results, is. And that's what he had to say on the matter.
Sorry, but it's been long enough that I don't recall his name off the top of my head. If I have time, I'll look for it and perhaps for that interview, as well. Or maybe someone else has a name and/or reference handy.
According to Black, the common argument that nothing can be prosecuted because it was all (perhaps regrettably) legal is totally wrong; rather, standard investigative procedures were simply not applied because there weren't the investigators to do it, and what you don't investigate you don't find.
I recall also his describing how they would "work up the chain". Where they had evidence of culpability at a lower level, they would use it to apply pressure to "flip" such employees against their management.
I think the description you cite is well taken.
I know someone who is fairly senior in the SEC. They have more or less confirmed what I've also read. The SEC is supposed to be self-funding. The revenue they take in (fees, etc.) has been far in excess of their budget. Instead of staffing up (woefully needed; occasionally promised -- most recently a couple of years ago; never delivered), Congress -- who sets their budget after incorporating that revenue into the general budget -- has treated them as a cash cow.
People need to look beyond "regulation is good/bad" labels, to learn and understand what is actually going on -- the specific circumstances.
Madoff could say, in his defense, "I don't know this was a Ponzi scheme, I was just incompetent". At that's similar to what these bankers are saying. We don't accept it as a defense, though; we just prosecute it.
The point is, there is no strict line between incompetence and fraud. Every fraud can claim incompetence.
The unfortunate truth is that the U.S. indeed prosecutes _obviously_ bad business decisions. Just not in the cases where the fish is big enough. (The same is actually true in my country, Czech Republic.)
You will probably find out that, for instance, central bank manipulations with currency are protected by police enforcement in forms of various laws and regulations anybody dealing with money needs to comply ("allowed to participate on the market"). Liberty Dollar founder was deprived of all his customers' silver and is being prosecuted. Bitcoin companies are all on the verge of being harassed etc.
Or, if you want to create an alternative bank or fund, you'll find it's not so easy to do: people with armed forces will politely ask you to comply with tons of regulations. It's basically a one self-protecting cartel and the basis of it is access to "legal" violent power.
- Ayn Rand, The Fountainhead
People were buying houses. This was great for politicians, great for the middle class, great for businesses. Politicians wanted this to continue, so they pushed for easier access to borrowing. Banks/Wall Street wanted this to continue, so they were lax about loaning standards. People wanted this to continue because home values were soaring, and they were able to "afford" nicer and nicer places.
Digging into it further, mid-level people in the banks, the ones responsible for handing out these 0-down mortgages, were pushing mortgages out the door as fast as they could. The model kept showing home prices soaring, and this mid-level mortgage official wanted his bonus. The home-buyer wanted that $750k house on his $70k/yr salary, because if he could only hold onto it for 5 years, it'd be worth $1.5m. Politicians wanted this to continue because they were raking in taxes on it.
And for years, this grew outrageously. Until suddenly the one thing that could bring the whole industry to its knees happened: a country-wide slowdown on buying houses. Suddenly home prices stagnated, mortgage rates rose and bam, everyone is fucked. Banks are stuck with loans that were given to people on the ragged edge of what they could "afford". People were stuck with mortgages that they could barely afford the interest on. Politicians were stuck with constituents who suddenly were shocked that they weren't able to afford the lifestyle they wanted.
Who's at fault? A little bit of everyone. Banks loaned money to people who couldn't afford a bump in the road. Should they have told people "nope, you can't afford that house"? Maybe. But at the same time, should a person have taken on the responsibility of a house they couldn't afford? Politicians, who are in charge of setting the rules of the game--should they have told the banks not to make loans? After all, their constituents were demanding it. Why shouldn't they have access to a booming housing market? Should the government have stepped in to tell people what financial risks to take?
It's a really, really tricky situation. And honestly, everyone is a bit to blame. Picking out a few CEOs to toss in jail seems arbitrary. What about the loan officer who wanted his bonus for a new pool? He's probably a middle-class person just like the majority of people in this. He wins because he pushed a mortgage, the client "wins" in the short term because he gets a crazy nice home. Do we prosecute all of the mid-level people at the banks too?
They weren't meant to diversify risk, they were meant to obscure risk.
>The home-buyer wanted that $750k house on his $70k/yr salary
The homebuyer always wanted this. The difference is that during this time, they were given this, and allowed to leverage the value of a piece of property that would always rise and never fall in value in order to pay for it.
>Until suddenly the one thing that could bring the whole industry to its knees happened: a country-wide slowdown on buying houses.
Or rather a country-wide slowdown of the rate of increase in buying houses, which was an inevitability.
>Who's at fault?
1) The people who kept swaps from being regulated as insurance.
2) The ratings agencies.
3) The people who took away the wall between investment banking and deposit banking.
5) Everybody who saw that the housing bubble was stupid, and made money from it anyway by selling it as sustainable.
6) General American innumeracy.
There are easy answers.
> The homebuyer always wanted this. The difference is that during this time, they were given this, and allowed to leverage the value of a piece of property that would always rise and never fall in value in order to pay for it.
Why was this? I'd argue that it's because the whole system wanted that to be true: politicians wanted people to be buying bigger and nicer houses. People wanted access to a nicer house than they can technically afford. Companies wanted to push mortgages out, then slice them up to try to minimize risk. The entire system from top to bottom wanted this.
> Everybody who saw that the housing bubble was stupid, and made money from it anyway by selling it as sustainable.
Just like the dot-com bubble, it's really who got left holding the bag. Many, many people made money off of it. Many middle class families also! People who sold a house when home prices were soaring. People who locked in low rates. Everyone knew that the home market wasn't going to grow forever, it was just a gamble as to how quickly the growth would slow, and how wide-spread defaults would be.
A average salary of 25K would have a 62k purchase price. according to zoopla there are precisely no houses in all of London at that price and a grand total of 66 flats for sale.
so for 50% of the 10 million people in London, prudence dictates that there are 66 available properties