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“It’s The People Stupid”: The Way To Stop Corporate Lawbreaking Is To Prosecute The People Who Break The Law

Today General Motors announced that it has fired 15 employees and disciplined five others in the wake of an internal investigation into the company’s handling of defective ignition switches, which lead to at least 13 fatalities.

But who’s legally responsible when a big corporation breaks the law? The government thinks it’s the corporation itself.

Wrong.

“What GM did was break the law … They failed to meet their public safety obligations,” scolded Sec of Transportation Anthony Foxx a few weeks ago after imposing the largest possible penalty on the giant automaker.

Attorney General Eric Holder was even more adamant recently when he announced the guilty plea of giant bank Credit Suisse to criminal charges for aiding rich Americans avoid paying taxes. “This case shows that no financial institution, no matter its size or global reach, is above the law.”

Tough words. But they rest on a bizarre premise. GM didn’t break the law, and Credit Suisse never acted above it. Corporations don’t do things. People do.

For a decade GM had been receiving complaints about the ignition switch but chose to do nothing. Who was at fault? Look toward the top. David Friedman, acting head of the National Highway Traffic Safety Administration, says those aware of the problem had ranged from engineers “all the way up through executives.”

Credit Suisse employees followed a carefully-crafted plan, even sending private bankers to visit their American clients on tourist visas to avoid detection. According to the head of New York State’s Department of Financial Services, Credit Suisse’s crime was “decidedly not the result of the conduct of just a few bad apples.”

Yet in neither of these cases have any executives been charged with violating the law. No top guns are going to jail. No one is even being fired.

Instead, the government is imposing corporate fines. The logic is that since the corporation as whole benefited from these illegal acts, the corporation as a whole should pay.

But the logic is flawed. Such fines are often treated by corporations as costs of doing business. GM was fined $35 million. That’s peanuts to a hundred-billion-dollar corporation.

Credit Suisse was fined considerably more — $2.8 billion. But even this amount was shrugged off by financial markets. In fact, the bank’s shares rose the day the plea was announced – the only big financial institution to show gains that day. Its CEO even sounded upbeat: “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.” (Credit Suisse wasn’t even required to turn over its list of tax-avoiding clients.)

Fines have no deterrent value unless the amount of the penalty multiplied by the risk of being caught is greater than the profits earned by the illegal behavior. In reality, the penalty-risk calculus rarely comes close.

Even when it does, the people hurt aren’t the shareholders who profited years before when the crimes were committed. Most current shareholders weren’t even around then.

Calling a corporation a criminal is even more absurd. Credit Suisse pleaded guilty to criminal conduct. GM may also face a criminal indictment. But what does this mean? A corporation can’t be put behind bars.

To be sure, corporations can effectively be executed. In 2002, the giant accounting firm Arthur Andersen was found guilty of obstructing justice when certain partners destroyed records of the auditing work they did for Enron. As a result, Andersen’s clients abandoned it and the firm collapsed. (Andersen’s conviction was later overturned on appeal).

But here again, the wrong people are harmed. The vast majority of Andersen’s 28,000 employees had nothing to do with the wrongdoing yet they lost their jobs, while most of its senior partners slid easily into other accounting or consulting work.

The truth is, corporations aren’t people — despite what the Supreme Court says. Corporations don’t break laws; specific people do. In the cases of GM and Credit Suisse, the evidence points to executives at or near the top.

Conservatives are fond of talking about personal responsibility. But when it comes to white-collar crime, I haven’t heard them demand that individuals be prosecuted.

Yet the only way to deter giant corporations from harming the public is to go after people who cause the harm.

 

By: Robert Reich, The Robert Reich Blog, June 4, 2014

June 7, 2014 Posted by | Auto Industry, Corporations, Financial Industry | , , , , , | Leave a comment

“Three Expensive Milliseconds”: Society Is Devoting An Ever-Growing Share Of Its Resources To Financial Wheeling And Dealing

Four years ago Chris Christie, the governor of New Jersey, abruptly canceled America’s biggest and arguably most important infrastructure project, a desperately needed new rail tunnel under the Hudson River. Count me among those who blame his presidential ambitions, and believe that he was trying to curry favor with the government- and public-transit-hating Republican base.

Even as one tunnel was being canceled, however, another was nearing completion, as Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was not, however, intended to carry passengers, or even freight; it was for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.

Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book “Flash Boys,” a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.

Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.

How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year.

Mr. Philippon starts with the familiar observation that finance has grown much faster than the economy as a whole. Specifically, the share of G.D.P. accruing to bankers, traders, and so on has nearly doubled since 1980, when we started dismantling the system of financial regulation created as a response to the Great Depression.

What are we getting in return for all that money? Not much, as far as anyone can tell. Mr. Philippon shows that the financial industry has grown much faster than either the flow of savings it channels or the assets it manages. Defenders of modern finance like to argue that it does the economy a great service by allocating capital to its most productive uses — but that’s a hard argument to sustain after a decade in which Wall Street’s crowning achievement involved directing hundreds of billions of dollars into subprime mortgages.

Wall Street’s friends also used to claim that the proliferation of complex financial instruments was reducing risk and increasing the system’s stability, so that financial crises were a thing of the past. No, really.

But if our supersized financial sector isn’t making us either safer or more productive, what is it doing? One answer is that it’s playing small investors for suckers, causing them to waste huge sums in a vain effort to beat the market. Don’t take my word for it — that’s what the president of the American Finance Association declared in 2008. Another answer is that a lot of money is going to speculative activities that are privately profitable but socially unproductive.

You may object that this can’t be right, that the invisible hand of the market ensures that private returns and social returns coincide. Economists have, however, known for a long time that when it comes to speculation, that proposition just isn’t true. Back in 1815 Baron Rothschild made a killing because he knew the outcome of the Battle of Waterloo a few hours before everyone else; it’s hard to see how that knowledge made Britain as a whole richer. It’s even harder to see how the three-millisecond advantage conveyed by the Spread Networks tunnel makes modern America richer; yet that advantage was clearly worth it to the speculators.

In short, we’re giving huge sums to the financial industry while receiving little or nothing — maybe less than nothing — in return. Mr. Philippon puts the waste at 2 percent of G.D.P. Yet even that figure, I’d argue, understates the true cost of our bloated financial industry. For there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.

So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society.

By: Paul Krugman, Op-Ed Columnist, The New York Times, April 13, 2014

April 15, 2014 Posted by | Financial Industry, Wall Street | , , , , , , , | Leave a comment

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