Nobel Prize Winner Joseph Stiglitz Calls for Jail Time for Corporate Crooks
dailyfinance.com
dailyfinance.com
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.
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.
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-...
Edit: Direct link to the video - http://blip.tv/file/4266077
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.
http://www.youtube.com/watch?v=Odbul86485w
but it wanted me to sign in, and I wouldn't. (I don't have a youtube account and didn't want to use my goog)
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.
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.
"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, note the word deception, in other words fraud or lying.
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.
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.
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.
Have all the justice you want. But don't fool yourself that it represents a solution. We need to take away the secrecy the "crooks" need to operate. This secrecy is actually provided by our regulatory and financial accounting system.
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...
"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.
A person signing a contract for a no-doc interest only 95% mortgage in 2004 knows what they are getting into. It's not like they were tricked into it by some evil banker.
http://news.ycombinator.com/item?id=1821278
The state of Texas has hit Amazon with a big fine, and Amazon is contesting it. If Amazon loses the case, and is therefore proven in a court of law to have been in the wrong, then should Jeff Bezos go to jail? If not, why not?
How far do you want to go toward criminalizing business activity? How much jail time do you want to give out?
You still haven't answer my question as to where in the article Stigletz wants to make a new category of behavior to punish? I don't see that anywhere in the article. Or did you just make that argument up and attribute it to him?
"What should be done? "I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison," said Stiglitz."
He's talking about sending people to prison.
Keyword: crooks, not failures
For fraud, a crime. Prison is for criminals... I don't see anywhere in the article where Stigletz says we should punish failure, only repeatedly referring to crimes/criminals being punished/jailed.
Also, read up on the S&L crisis, fraud was a big factor: Fraud and insider transaction abuses were the principal cause for some 20% of savings and loan failures the past three years[clarification needed] and a greater percentage of the dollar losses borne by the Federal Savings and Loan Insurance Corporation (FSLIC). http://en.wikipedia.org/wiki/Savings_and_Loan_crisis
So please get your facts straight before you start making up incoherent arguments to attribute to Stigletz and then arguing against your own pretend version of the his position.
Please find another comment to respond I've lost my patience because I'm wasting my time discussing this with someone who obviously doesn't consider facts/reality pertinent to the discussion.
Hank Paulson lobbied for that limit to be removed, unsuccessfully in 2000, then successfully in 2004. That banks and financial entities were levered up to 30:1, 40:1, even 60:1 on toxic securities when the crisis occurred grossly exacerbated it.
So essentially, 'gambling recklessly with credit' was indeed, for a long time, illegal. It was only Wall Street's increasing influence in Washington that got it legalized.
Yes, but in the old days, if a bank went over the leverage limit that the government had set, then the bank got fined, and was required to rapidly deleverage. No one went to jail.
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.
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.
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.
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?
However, I do see this: "We fine them, and what is the big lesson?" said Stiglitz. "Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you're still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards, but look small compared to the amount that you've been able to cash in."
Taken together, Stigliz said, this system of widespread fraud, lax regulation and non-deterrent enforcement, created a system of skewed incentives that rewarded criminality, gambling and other bad behavior, and left American workers, investors and homeowners holding the bill.
So please, why do you think jail time should be off the table for a white collar criminal who destroys the wealth of millions and of shareholders, but that jail time for say someone who steals a car is fine? That makes no rational sense. One is obviously more harmful, although a little less tangible than say stealing a car or a diamond, but it's still real value/wealth that they are effectively destroying/stealing.
You're acting like there is more innovation when there is less regulation, but that obviously isn't the case otherwise companies would be fleeing America for Africa.
>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.
This makes no sense, if they commit a crime, they should go to jail, end of story. We don't need to legalize crime to incentivize innovation.
We are talking about failure. If the gambles on derivatives had all come up 500% profitable, I think the conversation would be heading in a different direction. But the reckless financial gambles of the last few decades have ended in disaster. That is why we are now talking about jail.
For my part, I want to live in a country where people can recklessly trip into disaster, and not face any jail time. I want to live in a country that is forgiving of stupidity and failure and screwups. Tolerance of failure is essential to a dynamic economy.
Thus making it fraud.
Now how many times are you going to reply to this comment without actually answering my question in response: Where in the article Stigletz wants to make a new category of behavior to punish? I don't see that anywhere in the article. Or did you just make that argument up and attribute it to him?
You pointed to:"What should be done? "I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison," said Stiglitz." He's talking about sending people to prison.
Note the headline: Put Corporate Criminals in Jail
Keyword: crooks, not failures
Now I'm trying to assume you're not a troll, but my patience is wearing thin. You're making assumptions and misrepresenting Stigletz position, he never said we should punish failure, only punish crime--categorized by deceptive practices and deception--fraud.
Now please find some other comment to reply to if you can't even be bothered to argue against something in the article and instead choose to make up your own strawman argument for Stigletz, attribute that to him, and then argue against your own garbled argument. That's not his logic, that's yours.
"Note the headline: Put Corporate Criminals in Jail Keyword: crooks, not failures"
My friend, it is up to us (the public) to define what a criminal is. That's the whole point of this conversation. If you want to reason from the headline of the article then you are engaging in a bit of circular reasoning: the title of the article says these people are criminal, therefore the article must be correct, because criminals are bad.
I think you and I can agree that criminals are bad. The question is, what do we want to define as criminal behavior?
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... (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.
"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."
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!
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.