The consequences of tight money go far beyond unemployment

There’s an old saying that if you kill one man they put you in prison, if you kill 100,000 men they build a statue in your honor. A new article in The Economist suggests a corollary; if an individual extorts money he’s put into prison, if a government extorts money it’s praised for getting tough on banks:

To a public angry at banks for their role in the financial crisis, this may all seem like reasonable retribution. Yet in many cases the rush to punish is overturning basic principles of justice. Take the settlement agreed to by JPMorgan. The accompanying statements from both the bank and the regulator involved, the Federal Housing Finance Agency, provided no indication of what the firm did wrong and no admission of guilt. JPMorgan is the fourth institution to settle over its dealings with Fannie and Freddie without going to trial, following settlements by General Electric, Citigroup and UBS.

Bank executives contend that they have little choice but to accept punitive settlements because the alternative, facing a criminal indictment and going to court, could destroy their businesses, even if they are subsequently found not guilty. This is because they risk losing their banking licences or being shunned by clients while charges are pending. In some cases regulators make these threats explicitly. Last year New York’s financial regulator threatened to revoke the state banking licence of Standard Chartered, which would in effect have excluded the British bank from America. “If you’re a financial institution and you’re threatened with criminal prosecution, you have no ability to negotiate,” Warren Buffett, an investor, said recently. “Basically, you’ve got to be like a wolf that bares its throat…You cannot win.”

Most people react to this type of story that an emotional level; either the banks deserve what they’re getting (liberals) or they’re being treated unfairly (conservatives.) Let’s try to rise above emotions and look at this from a public policy perspective. I see two other issues here:

1. This allows President Obama to raise taxes on banks without congressional approval:

JPMorgan Chase agreed to the biggest of these settlements, of $5.1 billion (with perhaps billions more to come) related to mortgages that it, and banks it later acquired, had sold to two government-backed firms, Fannie Mae and Freddie Mac. In Europe Rabobank, a Dutch co-operative, agreed to pay almost $1.1 billion after admitting that some of its employees had joined in the manipulation of LIBOR, a benchmark interest rate. Piet Moerland, its boss, resigned. In Germany Deutsche Bank set aside €1.2 billion ($1.7 billion) in provisions for litigation. Swiss regulators told UBS to set aside 586m francs ($652m) against possible legal costs and fines.

A billion here and a billion there soon add up. SNL Financial, a data firm, reckons that over the past three-and-a-half years America’s six biggest banks have agreed to pay more than $65 billion in settlements related to the financial crisis and mortgages. Further claims and expected settlements will soon push this figure to $85 billion, it says.

Add in settlements agreed to or being negotiated by European banks and the bill easily tops $100 billion. These include the $1.9 billion fine imposed on HSBC over weak money-laundering controls, the $1.5 billion settlement agreed to by UBS for manipulating LIBOR and the £16 billion ($26 billion) British banks have set aside to compensate customers who bought useless loan-insurance policies. It is not just banks in the firing line. SAC Capital, a hedge fund, was expected to reach a $1.2 billion settlement of criminal charges relating to securities fraud as The Economist was going to press. This follows an earlier $616m settlement of civil claims against the fund.

Whenever the Obama administration needs more tax revenue they can simply “ask” banks for more money. Just like someone in the Mafia might “ask” a small shopkeeper for some money. In the old days the GOP-controlled House of Representatives would’ve been able to stop the Obama people from raising more revenue. That is no longer true.

2.  And the problems don’t stop there. The Fed’s tight money policy, which created the Great Recession and greatly worsened the financial crisis, has many other costs as well:

The bill presented to banks does not stop at fines and redress. The industry is spending billions more trying to comply with new rules of dubious worth. In the first half of this year HSBC added 1,600 people to ensure compliance with proliferating regulation. JPMorgan has added 4,000 people to “control efforts” since the beginning of last year, and increased spending to that end by $1 billion this year alone. Standard Chartered has added 2,000 compliance staff over three years, even as its total headcount has fallen.

Besides raising costs for banks and their clients the current climate of fear poses a number of longer-term risks to the financial system. The first is that big banks will be less ready to buy units of failed rivals, as JPMorgan and others did during the financial crisis. That will make future crises more difficult to manage. As worrying is that banks are being discouraged from confessing to wrongdoing or sharing concerns with regulators. That may make it more difficult for supervisors to assess future risks. And without any proper accounting of banks’ sins, no one will ever know whether justice has been done.

I know what you’re thinking; no regulatory bill is perfect. “Yes, there are flaws, but at least Dodd-Frank put an end to subprime mortgages and reined in the GSE’s.” Oh wait…

3. Or perhaps you are thinking; “Those rich bastards deserve it, at least they won’t come at little people like me.” In that case you may not want to read this article from the same issue of The Economist:

THE names of court cases usually make sense. Think of “US v Bernard Madoff” or“US v Timothy McVeigh”. What, then, is“US v $35,651.11”? Why is Uncle Sam prosecuting a heap of money?

The answer, alas, makes even less sense than the name on the docket. Terry Dehko and his daughter Sandy Thomas (pictured) run a grocery store in Fraser, Michigan. It sells everything from bread to hand-made sausages. Fairly often, someone takes cash from the till and puts it in the bank across the street. Deposits are nearly always less than $10,000, because the insurance covers the theft of cash only up to that sum.

In January, without warning, the government seized all the money in the shop account: more than $35,000. The charge was that the Dehkos had violated federal money-laundering rules, which forbid people to “structure” their bank deposits so as to avoid the $10,000 threshold that triggers banks to report a transaction to the Internal Revenue Service (IRS).

Prosecutors offered no evidence that the Dehkos were laundering money or dodging tax. Indeed, the IRS gave their business a clean bill of health last year. But still, the Dehkos cannot get their cash back. “They offered us 20%,” says Ms Thomas, “But if we settle, it looks like we’re guilty of something, which we’re not.”

In criminal cases, the government can confiscate assets only after a conviction. Under “civil forfeiture”, however, it can grab first and ask questions later. Property can be seized merely on the suspicion that it has been involved in a crime. Citizens have no right to a swift hearing.

Don’t you love the term “structure”?

The rule of law? What a quaint notion!

PS.  Just imagine the complexity of the ObamaCare regulations, and the possibilities it will open up for prosecutors. Remember that in America prosecutors are not interested in justice, they are interested in accumulating scalps to burnish the reputation when they run for higher office.

PPS.  Alex Tabarrok and Matt Yglesias have two very good posts on geese and golden eggs.  Both loosely relate to this post.

Have a nice day.


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63 Responses to “The consequences of tight money go far beyond unemployment”

  1. Gravatar of Saturos Saturos
    11. November 2013 at 07:49

    But Yglesias is so volatile in switching from excellent arguments to terrible ones: http://www.slate.com/blogs/moneybox/2013/11/11/mankiw_on_babies_they_re_not_porsches.html

  2. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2013 at 08:19

    Per Matty, taming Wall Street, doesn’t shrink economy, it just spreads wealth more evenly amongst the top 20%.

    Distributism and encoded smallness are natural expressions of the networked economy. Pushing power and decision making to the edge REQUIRES intentional coding.

    Networked code has to be anti-fragile, it has to ensure no node becomes to important. The code forbids it.

    What we doing in politics is learning to code in fault tolerance.

    Note in networked economy, figuring out where to place capital becomes more and more efficient, banking becomes more and more boring. The Venture Capital space is being torn asunder, its becoming less profitable to “know” where the capital goes.

    The MBA class is all headed rightfully to technology, where the lowest hanging fruit for the next 20 years is gutting the public sector labor force.

    Per distributism, conservatives are right to run on and deliver pushing the child tax credit to $3500, if not higher.

    The underlying argument to all of this is that in an economy where 80% are working in service sector, the “economic inequality” that matters in amongst the top 20%.

    We want as many of the top 20% as possible to be in the market for yoga lessons.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. November 2013 at 08:22

    What’s being done to JP Morgan Chase is particularly perverse, as Jamie Dimon was the one banking CEO who foresaw trouble with subprime early on, and got his bank to downsize their portfolio. Which put him into a position to be the logical banker to assist the Federal govt when Bear Stearns and WaMu went under. It wasn’t Dimon’s idea to take over those firms, but the Fed’s.

    As well, most of the other banks and non-banks in subprime were doing the bidding of the Clinton Administration’s Housing Initiative. Or, at least, responding to the incentives put in place by the same politicians now crying, ‘Banksters!’

    Not that this is anything new;

    http://sites.middlebury.edu/individualandthesociety/files/2010/09/jackson_lottery.pdf

  4. Gravatar of Dan W. Dan W.
    11. November 2013 at 08:47

    Scott,

    #1: Where do “bad regulations” fit in your economic narrative? Are they purely political issues? Or are they structural, inasmuch bureaucracy is very hard to change?

    #2: What is the magnitude of the impact of excessive regulation on the economy? Are these barriers that monetary policy can overcome or not?

  5. Gravatar of Tom M. Tom M.
    11. November 2013 at 09:07

    One of Jon Stewart’s all time greats in my opinion:

    http://www.thedailyshow.com/watch/wed-october-23-2013/a-nightmare-on-wall-street—jpmorgan-chase

  6. Gravatar of Peter N Peter N
    11. November 2013 at 09:10

    The case against the banks was misrepresenting mortgages to Fannie and Freddy as compliant when they weren’t. There’s not the slightest doubt they were guilty as sin. The documentation is overwhelming. There are also cases to be made for a several different forms of fraud on a massive scale.

    JPM Chase was both unlucky and somewhat stupid to buy Washington Mutual the way they did, as opposed to BOA buying Countrywide, which was just stupid.

    But JPM Chase seemed happy enough at the time, and they got to expand into other states in a way that would have been difficult in other circumstances. Even with the settlements and writeoffs, the deal may end up being net positive for them.

    “New York, Sept. 25, 2008 – JPMorgan Chase & Co. (NYSE: JPM) tonight announced it has acquired all deposits, assets and certain liabilities of Washington Mutual’s banking operations from the Federal Deposit Insurance Corporation (FDIC), effective immediately. Excluded from the transaction are the senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual’s banks. JPMorgan Chase will not be acquiring any assets or liabilities of the banks’ parent holding company (WM) or the holding company’s non-bank subsidiaries. As part of this transaction, JPMorgan Chase will make a payment of approximately $1.9 billion to the FDIC.

    The acquisition expands Chase’s consumer branch network into the attractive states of California, Florida and Washington State and creates the nation’s second-largest branch network – with locations reaching 42% of the U.S. population. The combined 5,400 branches in 23 states will also serve as an excellent base to extend the reach of the business banking, commercial banking, credit card, consumer lending and wealth management businesses. The acquisition also extends Chase’s retail branch network to additional states, including Georgia, Idaho, Nevada and Oregon.”

    Branches in California, Florida and Georgia are worth a good deal.

    The failure to admit wrongdoing is standard in these sorts of settlements, since it protects the banks from piggyback civil suits. You can read Judge Rakoff about this:

    http://www.nysd.uscourts.gov/cases/show.php?db=special&id=138

    you’ll have to save the file and add a .pdf extension by hand, since the link doesn’t have one.

    This has nothing to do with civil forfeiture, which has quite a different history and basis and is, to my mind, vastly more disturbing. It’s a subject I’ve been following fairly closely for a number of years now. It’s part of an overall pattern of using the criminal justice system as a profit center for law enforcement. Other examples would be things like making people pay for their own probation costs and then inflating these costs by requiring services supplied by people favored by the probation department.

    You may be interested to know that in some states, the counties have subcontracted forfeiture procedures to local attorneys for a percentage of the recovery.

    There are states where you might thing twice about driving in some counties in a rental car.

  7. Gravatar of William William
    11. November 2013 at 09:19

    Saturos: Sadly, Matt Yglesias is so overwhelmed by his conviction that Greg Mankiw is a bad and dishonest person that he is unable to respond intelligently to anything Mankiw writes. Yglesias is very good on many topics, but basically anything he writes on Mankiw must be ignored.

    This has been true for a long time:

    http://www.themoneyillusion.com/?p=9365

  8. Gravatar of Tom M. Tom M.
    11. November 2013 at 09:22

    Saturos,

    That Porsche post was devastating to Mankiw’s argument and one of the best posts of his in a long while.

  9. Gravatar of Robert H. Robert H.
    11. November 2013 at 09:23

    I am thinking: 4. Scott appears to be mixing up claims that prosecutors and regulators have too much discretion and negotiating power with claims that innocent action is illegal. Overly restrictive regulations on making bank deposits are a very different problem from prosecutors using the reputational affects of a prosecution to strong arm defendants. It’s the difference between bad laws and a bad system. 5. “Oh look, another person who only notices the power and abuses attendant to plea bargaining when they affect people who don’t look like typical criminals.” The worst thing that could happen here would be little fixes that make prosecutorial discretion and plea bargaining more bearable for the sympathetic and powerful without touching most cases. Obviously you can’t cover everything in a blog post, but on this issue it’s worth thinking about the accused drug dealer or murderer, not just the accused bank. 6. The hidden cost of ending plea bargaining is more money spent on trials and more people going to trials. This cost could be quite high: for example, right now banks can plea bargain to not get their reputation and regulatory standing trashed by a trial. No plea bargaining probably means less banks will be accused in the first place, but also that those who are accused are doomed. To some extent this is a regulatory problem if regulators are too quick to go after banks in legal trouble, but “regulators should ignore the possibility that a bank will lose crushing legal cases” isn’t obviously correct, and either way it doesn’t solve the reputational problem.

  10. Gravatar of jknarr jknarr
    11. November 2013 at 09:27

    The best regulation is bankruptcy.

    Everything else is a playground of corruption.

    $85 billion is small potatoes, too. About a week’s worth of federal spending.

    http://iowahawk.typepad.com/iowahawk/2011/03/feed-your-family-on-10-billion-a-day.html

    It’s all about a ongoing, gradual, political program – it does not have to make economic or ethical sense:

    Abolition of property in land and application of all rents of land to public purposes.
    A heavy progressive or graduated income tax.
    Abolition of all right of inheritance.
    Confiscation of the property of all emigrants and rebels.
    Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
    Centralisation of the means of communication and transport in the hands of the State.
    Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
    Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.
    Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the population over the country.
    Free education for all children in public schools. Abolition of children’s factory labour in its present form and combination of education with industrial production.[15]

  11. Gravatar of Doug M Doug M
    11. November 2013 at 09:33

    regarding #2.

    Dodd-Frank was supposed to end “Too Big to Fail” but if you need to have 2,000 compliance staff, what it has really done is crated a massive barrier to entry.

    Either you a mega-bank that offer all of the services, or you are a niche player that specialized in one type of service and uses the mega-banks for the rest of their clients needs. There is no way to transition from small-and-specialized to BSD.

    Dodd-Frank is limiting the diversity of large banks. Even if their ability if fail can be controlled through living wills, ring-fences, etc. their bigness has been compounded.

  12. Gravatar of Doug M Doug M
    11. November 2013 at 09:39

    Morgan,

    “Networked code has to be anti-fragile, it has to ensure no node becomes to important. The code forbids it.”

    Networks are designed to such that if one node fails the rest of the network can “share the load.” However, this only works if there is excess capacity on the network. If the network is sufficiently broad, it doesn’t take a whole lot of excess capacity as there are a lot of strands on the network to pick up the load.

    However, if the network is very efficient, or one one node is to important, or the fluctuation in loads is too acute, it is quite possible to crash the entire network — systemic failure.

  13. Gravatar of Brett Brett
    11. November 2013 at 10:08

    Civil forfeiture is pretty vile a lot of the time, and particularly if it goes straight into the coffers of narcotics units and police departments. You can even see that’s the case when civil forfeiture laws are changed so that the revenue goes into the general fund – the police become much less willing to use it.

  14. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. November 2013 at 10:12

    “That Porsche post was devastating to Mankiw’s argument…”

    Please explain. Is the explanation for the devastating nature of Y’s argument just like his summation: “That’s just the way it is”?

    I think I am going to start making that the foundation of all my devastating arguments in the future.

    I’ve got the following issues with Y’s rather superficial rebuttal:

    1. Is the fact that we currently subsidize child-bearing through our tax laws and public education system, ipso facto reason that we should do so in private market health insurance as well? (One of the reasons, presumably, for tax subsidies granted to families with children is, in the first place, to offset such costs of raising children, such as health insurance. This is done, however, through the public tax system and not the private insurance markets);

    2. If your answer to 1, above, is “yes” (illogical as that would be), are there any limits as to the amount of such subsidies that we should collectively give and the amount of interference we should exert on *private markets* in order to deliver these subsidies? If so, would this properly be a matter for public debate, rather than hidden in a multi-thousand page law that interferes with private contracts heretofore based on actuarial and other market based risks? Is there a more direct and appropriate mechanism for this sort of transfer?

    3. Mankiw’s main point seems to be that this is, to date, (that’s just the way it has been) a rather novel mandatory cross subsidy that is being injected into the private insurance market. If you and Y find it perfectly natural and thus favor it for health insurance, why not expand that to include mandatory subsidies for auto insurance, life insurance, home owner insurance etc. based on family size? For example, shouldn’t we mandate from now on that larger size households should pay less on their home insurance? After all, wouldn’t this represent the same sort of societal cross-subsidization of child-bearing which is the essence of Y’s “that’s just the way it is” argument? Or, is the answer to that, too, merely that “Houses are not children” and “that’s just the way it is”?

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. November 2013 at 10:30

    Let’s not forget that Fannie and Freddie were both under congressional mandate to step up their purchases of non-traditional mortgage loans. Over 50% by 2008.

  16. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2013 at 10:31

    “However, this only works if there is excess capacity on the network.”

    Doug, my point being there is massive excess capacity of the network such that:

    1. we must assume each end agent should have much responsibility and control as their resources allow.

    2. if anyone fails, we are best able solve for their breakdown.

    Any policy, social or economic, that follows this sees improvement / growth. Anything that fights it fails.

    —-

    “Monetary policy cannot overcome bad regs.”

    Yes, GI / CYB is required to solve unemployment.

  17. Gravatar of Steve Steve
    11. November 2013 at 10:50

    I’ve been saying for a while that the US is becoming Venezuela Lite. We’re maybe only 15% of the way there, but still trending worse.

    Here are some videos of the Daka looting:
    shorter one:
    http://www.youtube.com/watch?v=-BCNwqdHV_0
    longer one:
    http://www.youtube.com/watch?v=3D4Zktt_dCE

  18. Gravatar of ssumner ssumner
    11. November 2013 at 10:59

    Dan, Monetary policy cannot overcome bad regs.

    Tom, I only got part way through, as it seemed utterly moronic.

    Doug, Good point about TBTF.

  19. Gravatar of ssumner ssumner
    11. November 2013 at 11:03

    Peter, I disagree:

    “Take the settlement agreed to by JPMorgan. The accompanying statements from both the bank and the regulator involved, the Federal Housing Finance Agency, provided no indication of what the firm did wrong and no admission of guilt. JPMorgan is the fourth institution to settle over its dealings with Fannie and Freddie without going to trial, following settlements by General Electric, Citigroup and UBS.”

  20. Gravatar of Chuck E Chuck E
    11. November 2013 at 11:49

    Vivian,

    All good points.

  21. Gravatar of Tom M. Tom M.
    11. November 2013 at 13:07

    Vivian,

    All really terrible points. As a society, we treat children differently. As Y alludes to, you don’t have amber alerts and national news stories when a Porsche goes missing. That really is just the way it is.

    As to where it stops? It stops where the people, through their elected representatives, want it to.

    I know in libertarian fantasyland, insurance companies should be able to tailor policies that would exclude say Alzheimer’s coverage because, you know, that only happens to old people. But I wouldn’t want to live in such a society and I would hazard to guess the vast majority of Americans wouldn’t want to either.

  22. Gravatar of ssumner ssumner
    11. November 2013 at 13:14

    Robert H. Do you know of any blogger in the blogosphere who has complained more about 400,000 innocent Americans being imprisoned in the “War on Drug Using Americans” than I have? If so, which blogger? Wouldn’t you be better off directing your comments at someone like Paul Krugman, who never talks about the War on Drugs?

    As far as regulations, this is not about who violates the law. The regulations in America are so complex that all sizable firms violate the law. It’s about which group prosecutors decide to go after, and why. A good start would be to complete deregulate banking. That would reduce the need for prosecutions.

    As far as big bankers being “sympathetic,” I hope you are joking. I’d hate to think you really believe that.

    And finally, my comment was not about the decision to prosecute these banks, so your comment doesn’t really address the issues raised in this post.

  23. Gravatar of mpowell mpowell
    11. November 2013 at 13:30

    I agree with Peter on both the JPMorgan case and civil forfeiture. Just because the settlement statement didn’t include admissions of wrong-doing doesn’t mean they weren’t fully demonstrated by the state during the settlement process! I won’t claim to be an expert on the subject, but from what I’ve read it seems that there was ample evidence of wrong-doing by banks like WaMu. Exactly what kind of exposure JPM really had, I don’t know.

    Civil forfeiture comes from our inane anti-drug laws and, as others have mentioned, their usage as a profit center for the police. If I were a SC justice, I might be inclined to find that having the proceeds from a civil forfeiture or similar action benefit the public entity bring the action is an ispo facto violation of due process. There have been enough demonstrated abuses of the practice that there is no good reason to allow it any more.

  24. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. November 2013 at 13:43

    “I know in libertarian fantasyland, insurance companies should be able to tailor policies that would exclude say Alzheimer’s coverage because, you know, that only happens to old people.”

    I actually don’t object to insurance companies tailoring their policies to exclude certain risks, for example, I don’t think that a 20 year-old should be forced to insure himself or herself against that Alzheimer risk anymore than a 60 year-old should be forced to insure herself (or himself) against maternity risks. As to the latter, the ACA allows 20-year olds to opt out of insuring against maternity risks by purchasing a “catastrophic” policy, whereas the 60 year-old doesn’t have that option.

    That probably makes perfect sense to you. I find that odd public policy, but then again, I’m living in Libertarian Phantasy Land. Or, maybe it’s just the Alzheimer’s.

    It all boils down to the fact that you and Y favor a public policy that subsidizes children. Fine. But, again, you could further the same objective by giving parents with children lower home insurance premiums than parents home alone, etc, etc. The rhetorical thing about kids not being cars kind of reminds me of the silly debate over Citizen’s United. Cars don’t pay insurance premiums any more than corporations make political contributions.

    Think about it. There’s a better way to achieve your ostensible goals than by placing ridiculous and often inconsistent requirements on private insurance arrangements.

  25. Gravatar of errorr errorr
    11. November 2013 at 15:04

    Civil forfeiture is a nasty practice allowed by certain states. It is not a Federal practice and the money referenced above is a standard forfeiture as the allowable remedy under the law. The question I have is why they couldn’t buy insurance to allow over $10k insurance.

    The interesting thing is that they are NOT guilty of violating the law by actually breaking up the transactions, they are guilty of causing THE BANK to violate the law by not reporting the transactions. If they had just gone and told the bank what they wanted to do because of their insurance problems, and the bank then filed the necessary report then there would be nothing illegal.

    It is kinda weird but the courts have often considered that since deposit slips almost always have the notice that $10k+ transactions MUST be reported then people are aware that if they alter their behavior and cause the bank to violate the law they are guilty themselves of a legal violation.

    The bank itself was probably fined so what they did wasn’t harmless.

    The analysis with would be:

    1. They intended to restructure their transactions in such a way as to not hit the $10k threshold.
    2. The deposits were a single transaction in that in the ideal they would be consolidated into a single 10k+ transaction.
    3. Because of how they restructured the transactions they caused the bank to violate the law.
    4. Causing another entity to unintentionally violate the law is a violation of the law itself.

    Next time don’t cheap out on insurance or coordinate with the bank beforehand.

    Note: The law is meant to force the banks to do the legal groundwork for the feds so that they can catch money laundering. The banks know that they are on the hook food fines or loss of FDIC coverage if they fail. Situations like this force the banks to be extra careful y shifting incentives.

  26. Gravatar of Robert H. Robert H.
    11. November 2013 at 15:06

    Scott– complaining about the war on drugs is laudable, but it is not the same as complaining about prosecutorial discretion and plea bargaining, which is also a problem in the war on violent crimes and property crimes. Just so, over criminalization of innocent activity is a problem, but it isn’t the same problem as prosecutorial discretion and plea bargaining.

    To be specific, you seem upset that, whether or not they are guilty of activity amounting to fraud, prosecutors/regulators have the power to wheedle punative settlements out of banks. Well, “banks can’t commit fraud” isn’t some special banking regulation, it’s a rule that applies to all of us. Just so, the ability to strong harm doesn’t depend on innocent activity made illegal, it can also be a product of sentencing discretion or the existence of legitimate lesser included defenses. So If there is a problem here it is that regulators can say “play ball and you get a good deal, don’t and I drop the hammer.” The problem is not that there is a hammer set aside for fraudulent corporations.

    That’s why i say you are conflating the “some things that shouldn’t be illegal are” issue with the “prosecutors can put too much pressure on peope to forgo trial” issue , why I point out that the second issue applies not just to sympathetic (drug dealers) or powerful (banks) defendants but also, say, murderers, and lastly why I point out some of the costs related to getting rid of plea bargaining. To be clear I am less saying “you are wrong!” And more saying “I’m not sure you’ve thought through all this.”

    Now to the extent you think banks should be able to commit fraud, we just fundamentally disagree.

  27. Gravatar of Robert H. Robert H.
    11. November 2013 at 15:37

    Error– The Feds do indeed have civil asset forfeiture.

    http://www.forbes.com/sites/stephendunn/2013/02/18/asset-forfeiture-is-anything-but-civil/

  28. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2013 at 15:59

    Let’s take a moment and imagine pregnant Alzheimer’s patients…

  29. Gravatar of Geoff Geoff
    11. November 2013 at 16:49

    It’s not tight money that encouraged or allows the government to act like a gang of thugs.

  30. Gravatar of Robert H. Robert H.
    11. November 2013 at 16:50

    Scott– also, to the extent you have written about plea bargaining problems and are used to thinking about it as a seperate problem from other possible injustices in the criminal justice system, mea culpa. Again, I am more trying to be helpful than to pick a fight.

  31. Gravatar of Mike Sax Mike Sax
    11. November 2013 at 18:13

    “Whenever the Obama administration needs more tax revenue they can simply “ask” banks for more money. Just like someone in the Mafia might “ask” a small shopkeeper for some money. In the old days the GOP-controlled House of Representatives would’ve been able to stop the Obama people from raising more revenue. That is no longer true.”

    Ok, so in your world Wall Street banks and hedge funds are the moral equivalent of some ‘poor shopkeeper.’ You win-that’s the worst analogy of the year.

    As for the GOP House if they have no power that’s just as well as they only control the House due to gerrymandering anyway.

    Considering how much the banks received in public money I guess I don’t see the problem if they’re forced to pay a little back. Truth is these numbers are chump change in proportion to what they’ve received anyway.

    I guess Wall Street banks should be exempt from ever being taken to court if it might harm their stock prices.

  32. Gravatar of Peter N Peter N
    11. November 2013 at 19:08

    “Take the settlement agreed to by JPMorgan. The accompanying statements from both the bank and the regulator involved, the Federal Housing Finance Agency, provided no indication of what the firm did wrong and no admission of guilt. JPMorgan is the fourth institution to settle over its dealings with Fannie and Freddie without going to trial, following settlements by General Electric, Citigroup and UBS.”

    Statement? The FHFA already filed a 277 page complaint covering their allegations. What more do you want?

    http://www.fhfa.gov/webfiles/22597/FHFA%20v%20JP%20Morgan.pdf

    The stated causes of action were

    Violation of Section 11 of the Securities Act of 1933
    Violation of Section 12(a)(2) of the Securities Act of 1933
    Violation of Section 15 of the Securities Act of 1933
    Violation of Section 13.1-522(A)(ii) of the Virginia Code
    Violation of Section 13.1-522(C) of the Virginia Code
    Violation of Section 31-5 606.05(a)(1)(B) of the District of Columbia Code
    Violation of Section 31-5606.05(c) of the District of Columbia Code 254
    Common Law Negligent Misrepresentation
    Common Law Fraud
    Aiding and Abetting Fraud
    Successor and Vicarious Liability

  33. Gravatar of Geoff Geoff
    11. November 2013 at 19:23

    Mike:

    “Ok, so in your world Wall Street banks and hedge funds are the moral equivalent of some ‘poor shopkeeper.’ You win-that’s the worst analogy of the year.”

    Mike don’t be a fool. He wasn’t “equating” banks with shopkeepers. He was likening the behavior of the Obama administration’s behavior against banks with the behavior of mafias against shopkeepers. You know, shakedowns.

    And you’re lumping every bank into a “they deserve it” bin. That’s incredibly crude. What about the employees who end up in the cross fire? Collateral damage, huh? Yet they incur some of those costs. You think all 100% comes only from the fat cat executives who smoke cigars and carry money bags with dollar signs on them?

    Where’s the nuance in your analysis?

  34. Gravatar of Peter N Peter N
    11. November 2013 at 19:30

    You can’t deregulate banks and still have a system where all banks’ deposit liabilities are accepted at par. Gary Gorton wrote something about this recently. Checking account deposits are a relatively new development. They depend on customers and other banks having no need to concern themselves with counterparty solvency.

    You would be making the Fed’s job a lot harder.

  35. Gravatar of Steve Steve
    11. November 2013 at 20:06

    Geoff wrote: “What about the employees who end up in the cross fire? Collateral damage, huh? Yet they incur some of those costs.”

    Actually, I suspect bank litigation is one of the primary reasons we still have QE. Someone has to purchase all the mortgages that don’t make sense on a risk-adjusted basis for anyone in the banking sector.

  36. Gravatar of Steve Steve
    11. November 2013 at 20:09

    Also, there’s a very serious issue of legal process involved with the bank litigation.

    To wit, the people allegedly “harmed” by the banks’ underwriting of mortgages were, for the most part, insurance companies, and pension and investment funds. But these people are not receiving the proceeds of litigation, rather the government is keeping the loot.

    It would be like the government suing cigarette companies over lung cancer, and then keeping the money rather than reimbursing lung cancer victims. Oh, wait…

  37. Gravatar of Geoff Geoff
    11. November 2013 at 21:52

    Steve:

    “Actually, I suspect bank litigation is one of the primary reasons we still have QE. Someone has to purchase all the mortgages that don’t make sense on a risk-adjusted basis for anyone in the banking sector.”

    The Fed works for the banks. It’s a banker creation.
    If the mortgages were sold in the open market at bottom level prices, then the banks with mortgages on their books would have to declare losses which would bankrupt them.

  38. Gravatar of Geoff Geoff
    11. November 2013 at 22:17

    Money isn’t tight. It only seems tight because it was too loose prior.

  39. Gravatar of Vivian Darkbloom Vivian Darkbloom
    11. November 2013 at 23:52

    “Let’s take a moment and imagine pregnant Alzheimer’s patients…”

    Having taken that moment, the picture that somehow came to mind was Morgan Warstler. As I consequence, I’ve now, belatedly, come to the conclusion that it is not only a risk everyone should be insured for, but that one should be *required* to be insured for.

  40. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 02:05

    “Take the settlement agreed to by JPMorgan. The accompanying statements from both the bank and the regulator involved, the Federal Housing Finance Agency, provided no indication of what the firm did wrong and no admission of guilt.”

    Speaking of nuance I think the wrong nuance is being given to this statement. The fact that JP isn’t copping to anything here doesn’t mean it’s innocent. Actually it’s a break for them. Often you see companies do that- where they know they’re guilty but agree to pay a fine with an agreement they don’t have to admit to anything.

    The prosecutor takes the deal so they can avoid a lengthy court fight. As I read this both JP and the prosecutor probably realized that this could go on for a long time and so JP agreed to ‘no contest.’

    It’s not a question of simply ‘they deserve it’-though it is a fact that they all took in much higher numbers in bailouts than any of them are paying now. This is the law-Dodd-Frank.

    So for the Obama Administration there hasn’t been any breach of the rule of law-to the contrary as this quote makes clear it is actually enforcing Dodd-Frank. Now you may not like this law-I don’t see how anyone can prefer the previous status quo but that’s another matter-but there is nothing thuggish about them enforcing it-unless you think they simply should ignore every law based on whether someone out there disagrees with it.

    I mean because you disagree with it Geoff, or Scott does doesn’t mean that it’s thuggish for a law that passed by the democratic process to be enforced.

    And of course, while I eluded above to the fact of GOP gerrymandering, beyond that the fact is that there is nothing wrong much less illegal for the Administration to do this without GOP House approval even if their majority were legitimate-which it isn’t. This is, again, because Dodd-Frank was passed through the normal democratic legislative process.

    The GOP had it’s chance to stop it then and they failed to do so. I can imagine the Darrell Issa investigation of ‘shakedowns of JP’ and testimony after testimony amounts to ‘Congressman it’s the law, maybe you should take some time and actually learn that before you waste more taxpayer money on one of your fishing expeditions.’

  41. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. November 2013 at 02:24

    ” This is the law-Dodd-Frank.

    So for the Obama Administration there hasn’t been any breach of the rule of law-to the contrary as this quote makes clear it is actually enforcing Dodd-Frank.”

    Which provision of DF are you referring to? I believe that the settlement Scott was referring to was the alleged fraud in JP’s dealings with Fannie and Freddie in 2010. You mean that they are enforcing the Act with respect to alleged misconduct of JP Morgan that took place before the Act was enacted or effective?

    Breach of law? Or, breach of Constitution? Or both?

  42. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. November 2013 at 02:26

    Sorry, part of that text didn’t get through:

    “I believe that the settlement Scott was referring to was the alleged fraud in JP’s dealings with Fannie and Freddie prior to 2010. The earliest effective date of any provision of Dodd-Frank is July 22, 2010.”

  43. Gravatar of Peter N Peter N
    12. November 2013 at 05:47

    “683.

    The material representations set forth above were fraudulent, and the representations of J.P. Morgan Securities, BSC, and WaMu Capital falsely and misleadingly misrepresented and omitted material statements of fact. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. The representations on which the GSEs relied were directly communicated to them by J.P. Morgan Securities, BSC, and WaMu Capital. J.P. Morgan Securities, BSC, and WaMu Capital knew, or were reckless in not knowing, that their representations and omissions were false and/or misleading at the time they were made. J.P. Morgan Securities, BSC, and WaMu Capital made the misleading statements for the purpose of inducing the GSEs to purchase the GSE Certificates.”

  44. Gravatar of ssumner ssumner
    12. November 2013 at 07:23

    mpowell, I’d like to see the evidence.

    errorr, The optimal solution is to eliminate laws requiring banks to report deposits and withdrawals of more than $10,000. It’s none of the government’s business. Just a tiny part of our rush toward being a giant PANOPTICON.

    Robert, This isn’t about “committing fraud” this is about over-regulation. If you make the regulations complex then all corporations will necessarily “commit fraud.”

    In any case, you are discussing a completely separate issue from the issues I was addressing in my post–taxation without representation. And over-regulation. If you want to talk about your interests that’s fine, but that’s not what the post was about. I specifically said we shouldn’t be framing this as a “are you sympathetic to bankers” issue.

    Mike Sax, You said:

    Ok, so in your world Wall Street banks and hedge funds are the moral equivalent of some ‘poor shopkeeper.’ You win-that’s the worst analogy of the year.”

    I long for the day when just once, just one time, you don’t totally mischaracterize what I’ve said. The post specifically said this is not about sympathy for bankers. Read it 10 times in a row, or until you understand.

    Peter, Well if they made those accusations then they must be true. Is that your claim?

    Look, we know that all large firms violate the laws everyday. Some regulations are written in such a way that it’s impossible not to break the law. The only question is who the prosecutors decide to go after. Right now they hate banks. Perhaps tomorrow they’ll hate the oil industry, or Silicon Valley.

    You said;

    “You would be making the Fed’s job a lot harder.”

    That’s exactly the problem. In 2008 the Fed thought it was their job to stabilize banking, and they forgot that their actual job is to stabilize NGDP. In addition, I’d add that in 2007 US banking was one of the most heavily regulated industries in all of world history–I don’t see much evidence that regulation brings stability.

    Steve, You said;

    “To wit, the people allegedly “harmed” by the banks’ underwriting of mortgages were, for the most part, insurance companies, and pension and investment funds. But these people are not receiving the proceeds of litigation, rather the government is keeping the loot.”

    Good point. But there are still people out there who think this is about “justice,” not about the Obama Administration raising revenue without having to go through Congress.

    Peter, I just love that line “or were reckless in not knowing”. A prosecutor’s dream. By that criterion most bloggers commit fraud every single day.

    But Fannie and Freddie were not reckless in not knowing, just innocent little babes in the woods, who had NO IDEA that anyone who could fog a mirror in 2005 was getting a mortgage, no idea at all.

  45. Gravatar of Scott Freeland Scott Freeland
    12. November 2013 at 09:04

    Scott,

    I think Dodd-Frank could be disastrous for a few basic reasons:

    1. The regulations are complex, meaning they can easily create inefficiencies and opportunities for exploitation and regulatory capture.

    2. There are too many regulators involved. Why not have just one regulator of financial markets, to prevent a race to the bottom by a number of regulators competing to eventually work for the companies they’re regulating? Also, of course, overlap problems, gaps, inter-regulator wrangling, and loafing are also potential problems.

    3. Regulators have too much discretion. Why give such powers to relatively low-paid bureaucrats who can leave so much gray area in some cases, inconsistency in rules and enforcement, etc.?

    My approach would be to have one regulator that enforces a very limited number of hard and fast rules.

    For example, forbid any conflicts of interest in the financial services and products sector, making them criminal, with personal criminal and civil liability for all who violate the law? This would make full service broker services illegal, for example, requiring those in the industry to either be brokers or fiduciaries for clients.

    A softer alternative could be disclosure requirements for all conflicts of interest.

    Another example would be a requirement for a minimum down payment and/or max percent of current verifiable income vis-a-vis possible payments for mortgage qualification.

    Couple this with almost total deregulation of activities of traders. Eliminate all day trading rules and restrictions, stop requiring suitability applications for option trading, no more accredited investor criteria to participate in private placements or pre-scondary market IPOS, eliminate all federal rules on margin equity requirements, allow insider trading, etc. Level the playing field and let investors do what they want when it comes to trading.

    This would vastly cut away FINRA and SEC authority over private investors, which, in my view should focus more public disclosure and preventing fraud.

    This is just a thumbnail sketch.

  46. Gravatar of Scott Freeland Scott Freeland
    12. November 2013 at 09:06

    Oh, and I would repeal the Patriot Act similar laws and regulations and go back to the gold ole days when no one asked you where your money came from. I favor total deregulation of money movement in the US and around the world.

  47. Gravatar of Scott Freeland Scott Freeland
    12. November 2013 at 09:12

    While I’m dreaming, eliminate the income tax for most people and companies, eliminate investment taxes, and move to taxing externalities and wealthy consumption, so that all IRAs, 529 plans, 401ks, and all other qualified retirement accounts go away, with all the stupid complexity they entail. I submit that the complexity tax on investment in this country may be far higher than the monetary taxes.

  48. Gravatar of Robert H. Robert H.
    12. November 2013 at 09:23

    Scott– You spent most of your post talking about, as I understand it, a bank that was accused of intentionally misleading Freddie and Fannie as to material facts in order to deprive them of money for its own benefit. The bank then agreed to pay the government some money to settle the issue without prejudice, doing so under all the pressure regulators could bring to bear. That is an example of government regulation, but what the goverment is regulating is fraud.

    To the extent you have a problem with regulators bringing all that pressure to get a settlement, most of those pressures weren’t regulatory and are common to most plea bargaining situations (ie, playing on the defendants desire to avoid legal fees, threatening outrageously punitive punishment should they lose at trial, pointing out what a protracted trial which could assess a mega fine will do to their standing with investors and creditors, and offering a settlement that won’t prejudice them in other matters) . So that’s a plea bargaining story. To the extent you think this only happened because so much is illegal banks can’t avoid breaking the rules, nope. The rule they broke was “don’t commit fraud”, and it’s easy to know about and not break that rule.

    Again, I get the issue you were concerned abou was the government making to much illegal, turning everyone into a criminal. But you’ve accidentally mixed in a completely seperate issue. The tangent I am going off on isn’t me randomly talking about my own thing, it’s me pointing out that you confused your thing with my thing in some of your examples. If you want to talk about how banks can’t jump left or right without tetchy rules tripping them up, you should pick an example where the tetchy rule isn’t a serious crime everyone knows and agrees should be illegal. If you don’t want to talk about prosecutors and regulators forcing people into plea bargains and settlements, don’t quote people talking about that!

  49. Gravatar of Robert H. Robert H.
    12. November 2013 at 10:11

    I want to be clear that I am agnostic as to whether the banks *did* commit fraud. I’m not saying they are such bad guys that they deserve this, I’m just saying that, once they are accused of fraud, the problem is not “man so much is illegal prosecutors can go after banks for anything.” What the prosecutors are going after them for isn’t “anything,” it’s the obviously immoral and often illegal act of fraud, ie intentionally decieving people as to material facts in order to secure a benefit by depriving them of something tangible.

  50. Gravatar of Scott Freeland Scott Freeland
    12. November 2013 at 10:14

    Scott,

    I think Robert H. made a point. Shaking down banks, even if that’s what’s going on, is certainly nothing unique to banks. This happens all the time to others, especially the poor who get accused of acts that shouldn’t even be crimes and get railroaded into pleading guilty, even when innocent.

    I don’t think this undermine’s your point, but I’m not convinced that the big banks aren’t often, if not always, guilty. The mere fact that banks could suffer death by PR for even challenging charges is not one a law enforcement operation can let prevent it from enforcing the law.

  51. Gravatar of Peter N Peter N
    12. November 2013 at 10:43

    Yup, picking on the poor innocent banks.

    Well, let’s see -

    We’ve got the mortgage securitization fraud charges, where a number of parties other than Fannie and Freddy have sued on the same grounds

    The robosigning cases involving falsely notarizing hundreds of thousands of documents and making false statements to the courts. In many cases they also miscalculated the amounts owed (always in the banks’ favor, somehow) even aqgainst the explicit directions of the court. And you have a few cases of people being evicted from homes where the mortgage had been paid off or on which they didn’t hold a mortgage.

    Then there’s price fixing the Libor index.

    And there’s HSBC laundering money for drug cartels, a case in which there was an admission of guilt.

    And the auction rate securities cases where the plaintiffs are mostly cities and states.

    In most of these cases the problems arose from asymmetric information, perverse incentives and conflicts of interest.

    All together it looks like the banks will end up paying over $100 billion to settle all these cases by the time they’re done, and it won’t be from cases brought by federal regulators. It’s rather expensive blamelessness.

  52. Gravatar of Peter N Peter N
    12. November 2013 at 10:56

    it won’t be ALL be from cases brought by federal regulators.

    This is a list of JPM settlements

    http://www.thedailybeast.com/articles/2013/05/08/jpmorgan-chase-s-crazy-fine-tally.html

    This is BOA

    http://www.thedailybeast.com/articles/2013/05/08/jpmorgan-chase-s-crazy-fine-tally.html

    and a BOA update

    http://www.forbes.com/sites/halahtouryalai/2013/06/04/why-bank-of-america-is-in-court-two-years-after-its-8-5b-settlement/

  53. Gravatar of Randy B Randy B
    13. November 2013 at 12:09

    I agree with Peter N here. The banking industry has not been abiding by the rule of law for a while, but it is very difficult to prove these cases. Particularly with understaffed and unsophisticated regulators. In fact, the settlements are petty compared to the actual value of unlawful activity perpetrated.

    To compare these settlements to extortion of the banks is a joke. It would be more appropriate to say the banks are bribing the governments from fully investigating their practices.

    I am very disappointed to see the views of bank executives and significant investors passed a face value here. I like this blog a lot, but it should stick to monetary policy.

  54. Gravatar of flying spagetti monster flying spagetti monster
    14. November 2013 at 14:08

    Scott Sumner has yet again capably demonstrated his ignorance. This time he’s clueless about the legal system. Before he was, and most likely still is, ignorant about banking. I feel so sorry for people who are taught by you. You are a twit and an arrogant douchebag. Its sad that someone, who’s area of expertise is supposedly monetary policy wouldn’t understand banking or at least be in the process of learning about it. Likewise, your incomprehensible pipe dream of establishing a NGDP futures market to guide monetary policy should be informed by an intimate understanding of futures markets or someone else’s but, you don’t have any interest in learning about these things or being understood by people who do. You know less about how the real world works than my 10 year old. You’re a pathetic excuse for an educator.

  55. Gravatar of ssumner ssumner
    14. November 2013 at 20:28

    Scott, Of course I agree with your policy views, I’d even be more aggresive, deregulate everything.

    But your comment on whether banks are or are not “guilty” is an utterly meaningless question. What does it mean for a big company to be “guilty?” They violate the law because it’s impossible for a large business to not violate the law. The laws conflict with each other in many areas.

    One commenter mentioned laundering the money of drug dealers. The minute we decide as a society to have an insane war on drugs, we will have massive corruption and the banks will inevitably be involved in it. So yes the banks are “guilty”, just as 90 % of Americans cheat on our insane tax system. But the problem isn’t the banks it’s the insane tax system, the insane regulatory system, the insane war on drugs, etc etc,

    We need to become a society where it is legal to pay no income taxes, and where it is legal to launder the money of Colombian drug dealers. Then we won’t have so much “guilt.”

    The comparisons to DA’s pressuring others is not relevant. Banks are special, they go broke if indicted. Other people have at least a prayer of beating the rap, banks don’t. So a guilty plea means nothing, other than that the bank might or might not be “guilty.” But we knew that before the guilty plea. That’s not to say prosecutors are not abusive to little people, indeed I provided an example of such abuse in this post.

  56. Gravatar of ssumner ssumner
    14. November 2013 at 20:46

    Robert, I think we are talking past each other. Do you have any examples of the government collecting $100 billion in fines from pickpockets or car thieves? If not, then how is the abuse of little people relevant to this post? I specifically said I was not interested in the issue of whether we should feel sorry for the big banks or not. That’s not the issue. The issue is a $100 billion tax that Congress did not enact.

    I guarantee that banks do whatever they were accused of here all the time, but they were’t prosecuted under Clinton or Bush because banks were not so unpopular hence not an easy target.

    Suppose you headed a large bank that was falsely accused by the Feds. What would you do? Would you fight it and go bankrupt? Or would you plead guilty? Suppose you had a duty to act in the interest of the shareholders. What would you do? I’d plead guilty, which tells me that the guilty pleas mean nothing at all.

    Peter, If you think a guilty plea means anything in this area then you obviously did not read the article in the Economist. They have to plead guilty, they have no other choice.

    You mentioned the LIBOR “scandal.” Did you know the BoE knew this was going on, and at times even encouraged it?

    As for money laundering, I favor it. I’d engage in jury nullification in any case where I had the chance to undercut the war on drugs.

    Everyone, I’d encourage everyone to think more logically and less emotionally. All this talk about whether banks are good or evil has absolutely no bearing on anything I said in this post. They could be run by a bunch of Nazis for all I know, and it would not cause me to re-evaluate anything I said.

  57. Gravatar of ssumner ssumner
    14. November 2013 at 20:55

    Randy, How can they obey the rule of law when there is no rule of law in America? We have rule by the whim of bureaucrats.

    Which law do you want them to obey? The Privacy act? The Patriot Act? Dodd-Frank?

    If you think I am somehow sticking up for bank executives then you have not understood a word I have written. Please think logically and not emotionally. Or else produce the quote where I claim bank executives are good guys. Suppose I said “Joe extorted money from his neighbor, who is a secret pedophile.” Would you accuse me of defending pedophiles? Please be logical.

  58. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. November 2013 at 01:57

    I agree with Scott that there is a growing and very troublesome increase in “shake-down prosecutions”. This is, of course, nothing new. In a phrase, it’s known as the abuse of prosecutorial discretion. Those who argue it’s ok for prosecutors to shake down banks because little guys sometimes get the same treatment are guilty of the “tu qoque” logical fallacy (along with appeal to pity, etc, etc).

    All it takes for a prosecutor to bring a case is a colorable claim that someone has violated the law. That’s not a very high standard and given the byzantine set of laws and regulations that banks (and everyone else, but especially banks) operate under it is not at all difficult to come up with a charge that likely won’t stick if brought to trial, but prosecutors often depend on these things never going to trial.

    When faced with criminal or civil prosecution, banks and other businesses, big or small (recall the case against “$35K” referred to previously) face a Hobson’s Choice: Either cop a plea of some sort, cough up a few billion, million or whatever, or face a lengthy and extraordinarily expensive litigation that will, in the interim, hurt the business whether one is “guilty” or not.

    And, those who do have the means and the will to fight, have a pretty good record in litigating these cases. Unfortunately, that does not make them “winners”.

    I don’t see any easy answer to this problem. One way to counter the abuse is to call out prosecutorial indiscretion in the media and, to Scott’s credit, he’s done his little bit here.

    The other answer might be to increase the penalties for prosecutorial abuse which is hardly ever punished simply because, unlike starting an inappropriate prosecution, the bar is set too high rather than too low. Also, courts should start awarding attorney’s fees and consequential damages when those prosecutors lose their cases at trial (this hardly ever happens). That might give folks like Eliot Spitzer pause when they try to use their positions of public trust as bully pulpits to advance their political aspirations.

  59. Gravatar of ssumner ssumner
    15. November 2013 at 12:35

    Vivian, I think complete, 100% deregulation of banking would greatly reduce lawbreaking.

  60. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. November 2013 at 12:50

    Scott, I think complete, 100% elimination of all laws and regulations would greatly reduce lawbreaking (by 100 percent)!

    Alas, I’m not sure that’s the answer, although I agree that regulation has run a bit amok.

  61. Gravatar of Randy B Randy B
    18. November 2013 at 07:49

    Scott,

    I didn’t accuse you of saying bankers are good guys. I work in banking and don’t really even think that is an important question. The impacts you have on society often have little to do with whether you are a good or bad person. Particularly since all of that is subjective.

    What I am charging is that you uncritically quote biased parties like Warren Buffet and bank executives to build your claim of extortion. Those parties are saying here is no choice but to pay a fine when accused. However, that stands in stark contrast to reality where large financial institutions fight prosecution vigorously with almost unlimited resources. I see this premise as the basis of your extortion claims and thus reject the validity of that argument. I think that is logical, not emotional.

  62. Gravatar of ssumner ssumner
    19. November 2013 at 10:22

    Randy, Perhaps I misunderstood your comment. Many commenters were claiming I was defending bankers. I thought you were as well. Apologies if I misunderstood.

    As for the facts, I relied on the Economist magazine, which is often critical of bankers. If their facts are wrong, then I will change my opinion.

    Which banks are currently being tried for felonies?

  63. Gravatar of dtoh dtoh
    19. November 2013 at 10:58

    Scott,
    Great post. Agree with everything you say.

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