Posts filed under “Regulation”
The news leaked over the weekend: Hedge-fund baron Steve Cohen and SAC Capital Advisors were about to pay a monster fine for a decades worth of insider trading and failed supervision of traders. Some prefer the term “expert networks,” but – po-TAY-to, po-TAH-to.
The rules have changed, and so have the penalties. The lessons of the post-crisis era are clear:
• Laws are made to be broken
• Steal Big or don’t bother.
• Always reserve 10% of your criminal proceeds for your newest partner, Uncle Sam, to settle all claims, both civil and criminal.
This is a huge shift in the mentality of prosecutors, defense attorneys, accountants and constitutional scholars.
Lack of criminal prosecutions for bankers, hedge funds managers and other moguls has altered the calculus — huge fines are now a cost of doing business.
Whether you enjoy foreclosure fraud or find insider trading profitable or made money by reckless lending of subprime mortgages to people you knew would default or found your calling creating structured products designed to implode, the Rule of Law no longer applies to you.
Better make some hay while the sun is shining! It’s the newest form of tithing, between Uncle Sam and any financial mogul caught with his hand in the cookie jar.
By all appearances, the once-fierce visage of the Securities and Exchange Commission and the Justice Department has altered radically. Formerly the scourge of white-collar criminals, the prosecutorial apparatus has now morphed into a supersized meter-maid. The goal is no longer discouraging reprehensible behavior or stopping criminal activities; nor is it encouraging confidence in the markets. Rather, the former enforcers of the law have become a giant revenue collecting organization — Rule of Law be damned.
We have seemingly forgotten why we put people in jail in the first place. As public service, a brief reminder:
In the U.S., we have civil and criminal statutes. We create different levels of penalties for punishing different types of behavior. As a society, we want people to understand exactly what is and isn’t allowable. Some behaviors are frowned upon, and when those laws are violated, a monetary penalty is exacted. Driving faster than the speed limit or making false and misleading statements in the sale of a security leads to a fine, and a blot on your record.
There are other behaviors that are so reprehensible, so dangerous to all of society, that in response we impose a loss of liberty to any who are convicted of committing these crimes.
We make a very clear distinction between the two types of laws, and what the penalties are for violating them. At least, we used to.
Nowadays, so long as you can write a large enough check, you can escape criminal prosecution. Yes, it’s a lot of money and a blot on your reputation. But that’s what CIVIL prosecutions are supposed to be for.
When trying to reduce or eliminate a behavior with extremely negative repercussions for society, we bring out the big stick: Jail time.
At least we used to. Today, not so much.
Decades from now, when legal scholars try to pinpoint the moment when the U.S. abandoned the Rule of Law, they will point to 2008 crisis as a turning point.
The greatest innovation of the financial sector is not the ATM machine or interest-bearing checking accounts or securitization: It was convincing the powers that be that prosecuting them for their actual crimes would (once again) bring the economy to the edge of the abyss.
Every now and then, I read an article that is factually accurate, technically correct — and utterly misleading. Items like this are “accurate but false” as they leave the reader with an impression of something that is incorrect. Because the world is nuanced and not black and white, the sum of many facts, statistics and…Read More
Greenspan discusses many of the ideas he had reversed himself on regarding the financial requirement.
Note he has adopted my Partner’s Joint & Thesis Liability explanation (from BN) that states the move to Corporate structure from a Partnership radically reduced the focus on risk management.
Click to enlarge A previous discussion on the founding and dissolution of the First Bank of the United States (BUS) which existed from 1791 to 1811. After the First BUS recharter was defeated, the United States suffered defeat in the War of 1812, and suffered from a lack of fiscal order and an…Read More
click to embiggen Source: BCA I have been meaning to get to this since I was in Toronto last week, where I saw my friend (and fishing partner) Martin Barnes of BCA give an excellent presentation at the Toronto CFA Prediction Dinner. One of that charts that really stood out to me was…Read More
Fines here, fines there, fines everywhere! The Wall Street Journal discusses the proposed $11 billion dollar JPM fine, but buries the good stuff in this morning’s article on Jamie Dimon (This Generation’s Greatest Banker! ®) We have been tracking JPM’s fines, but if you want an industry overview, try this collection: Here is a quick…Read More
click for ginormous graphic Source: NYU VLAB I mentioned NYU’s VLAB earlier, but one more trick I wanted to share: You can drill down by region or even country to see how much risk is in the system. Note that this is a function of both size and riskiness, i.e., a very small reckless…Read More
Click to enlarge Source: Institute for New Economic Thinking NYU prof Robert Engle, who long-time blog readers may recall from this post a ways back, won the Nobel prize for his work on Volatility. He has developed new ways to measure “Systemic risk” from his perch at the Volatility Institute at NYU: “We…Read More