A more humane Mikado never
Did in Japan exist,
To nobody second,
I’m certainly reckoned
A true philanthropist.
It is my very humane endeavour
To make, to some extent,
Each evil liver
A running river
Of harmless merriment.My object all sublime
I shall achieve in time —
To let the punishment fit the crime —
The punishment fit the crime;
And make each prisoner pent
Unwillingly represent
A source of innocent merriment!
Of innocent merriment!
Check out the graph at Barry Ritholtz’s place illustrating the relative incomes of companies and the punitive damages imposed on them for transgressions. Note, especially, the cases of financial services companies and oil companies.
For something to be a deterrent there are several factors that need to be in place. First, there must be an expectation of discovery and punishment. Second, the punishment must be sufficiently grave. Otherwise the punishment will merely be seen as an acceptable risk, a cost of doing business.
I don’t think it helps that most of our legislators and judges haven’t taken a math course since junior high (and that was forty years ago). I genuinely believe that they have no internalized sense of the differences between a million, a billion, and a trillion.
None of the infractions illustrated in the graphic were mere regulatory transgressions; they were all malum in se. Shouldn’t these be treated much more seriously than they apparently are?
I think this just begins to address the problem. Suppose you make the fines larger on BOA. Who pays? Certainly not those who committed the crimes. First you have to get caught. Next, the prosecutors have to win a, usually, complex case. Then, the company gets fined. Meanwhile, those who directly benefitted walk away with millions. (Yves site tried to run estimates yesterday and figured traders made about $3 million a year each from the LIBOR scandal.)
If there is anything everyone should believe from economics, it is that incentives matter. The incentives of the financial companies and those who work for them really are not aligned. Find a way to make the punishment affect those who commit the fraud/crime, and maybe we have less of it.
Steve
I stopped at Barclays, which weren’t punitive damages, they were given “civil penalties,” which usually are not punitive are typically described as intenting to have a deterrent effect. They are usually described as remedial, compensating for a public or generalized loss, usually without any need to estalish ill motive.
In Barclays case, they were found to have _attempted_ market manipulation and so the public loss appears to be a generalized loss in the confidence of the system. The penaly was conditioned on imposing a number of internal checks to safeguard against future problems. Its my understanding that the individuals involved are still subject to potential criminal prosecution in which Barclays is required to help.
Did you read that Timmy Giethner had to explain that earning up to the next tax bracket doesn’t mean you have to pay that percentage for everything up to that bracket to a bunch of Democrat Senators?
Did you read that Timmy Giethner had to explain that earning up to the next tax bracket doesn’t mean you have to pay that percentage for everything up to that bracket to a bunch of Democrat Senators?
Frankly I’m surprised that Geithner knew that.
On the other hand legislators knew enough to get the PPACA under the President’s cost ceiling and get a CBO score showing a small deficit reduction. Clearly they know how to play the numbers game when it’s in their interest to do so.
Andy, their STAFFERS did all that work.
Despite my niggling point about the differences between civil penalties and punitive damages, I think the linked analysis is underinclusive. These companies can be expected to also pay compensation to the victims; the reason that Exxon “only” had to pay $507 million in punitive damages was that the jury only found Exxon liable for $507 million in compensatory damages (for reckless conduct), and the courts want punitive damages to relate to actual damages. Exxon also had a couple billions of dollars in clean-up costs and a billion in civil penalties and judgments from the government.
PD- Why is there almost never criminal prosecution?
Steve
Add economics to that too Dave….
Steve, that is not true, depending on the relative elasticities both the supplier and the consumer will pay. Sure firm’s prefer to pass on all of their costs, but the laws of supply and demand say, “No! Only some of them.”
Steve V- Sure. The company pays, the consumer pays, but the fraudsters, what do they pay? Anywhere nearly proportional to the damage done?
Steve
steve — I don’t know that they almost never prosecute criminally, and I’m not sure if you mean prosecute the corporations or individuals.
As to corporations, I think you are correct about the inherent limitations in getting larger sums from a big corporation. You cripple a bank financially, and they lay off a bunch of tellers who weren’t involved. In regulated areas, the civil penalty route is probably preferred because you can likely get a large monetary award without the expense and burdens of a criminal lawsuit, and you can get a compliance agreement going forward to guard against future repeats. The government can proceed both criminally and civilly, but they generally need to employ parallel civil and criminal staffs.
As to individuals, I think it happens, we just don’t know the names of these people. Criminal liability is premised on some sort of scienter requirement (willful misconduct, malice, gross recklessness) that is probably rare in an organizational activity, where multiple actors contribute, not necessarily for personal benefit. The Captain of the Exxon Valdez was convicted of criminal negligence, and sentenced to a $50k fine and community service. His supervisors were reckless, should they have gotten the same sentence, or were their omissions merely indirect?
steve– from what I’ve been able to read about Barclays, the government identified a number of traders and other people who at least attempted to commit a crime. They have the e-mails as evidence; they have proof of a criminal scienter (a fruadulent intent), a maul in se crime thats obvious without knowing complex regulations . . .
But there does seem to be a piece misssing. The LIBOR is based upon a survey of sixteen banks, with the top four and bottom four banks discarded. How could one bank actually manipulate LIBOR ? Was there a conspiracy across many banks? Or is this a sort of diffused injury to the system? If nobody can prove actual injury from the criminal misconduct, a criminal sentence might be light. If someone has to prove a conspiracy across different organizations, it might be tough.
PD- There were at least two kinds of fraud, and probably more. One was the fraud that occurred after the crisis. Banks reported rates at which they claimed they could borrow that were entirely fictitious. This was the manipulated numbers regulators were probably aware of. The other occurred pre-crash. It seems as though they had some method of knowing what the other banks were reporting, then altered their numbers to get the LIBOR they wanted, though they could only manipulate it by a point or three. It is implied that they used made up numbers entirely when making derivatives contracts. I dont know if that part is actually true.
Steve