The Case For the Corporate Death Penalty: Restoring Law and Order on Wall Street
US: Jan 2017
The United States is suffering a crisis in the rule of law.
This is apparent on many levels. It’s evident in the weekly struggles of Trump’s new administration and its efforts to target Muslims and Mexicans (and others) and challenge the judicial establishment which has spent the better part of the country’s history developing jurisprudence designed to prevent lawless bigotry and fascist populism.
But even before Trump entered office, the US was struggling with an eroding rule of law, visible not just in the daily struggle of African-Americans and Mexicans and Muslims to survive in the face of militarized police and border patrols and Homeland ‘Security’ agents, but also in the reckless criminality of the country’s financial elite. This was a crime spree that took place not under the chest-thumping bigotry of a Trump administration—but on the watch of Obama’s Democrats. Indeed, perhaps it was the Obama administration’s weak-kneed response to corporate crime that emboldened the country’s corporate financial elites to grasp higher and dare farther.
The US financial crisis of 2007-08 saw dozens of companies and individuals commit a wide range of fraud and financial crimes, line their pockets with billions of dollars, wreak havoc on the global economy, and inflict tremendous pain on poor and middle-class communities. Most shocking of all, those responsible for the crimes walked away scot-free. Many of the corporations that committed fraud are still operating; many of the individuals who spearheaded criminal schemes took their ill-gotten gains with them and continue to work in the financial sector and reap personal reward despite the significant social and economic damage they caused.
Legal scholars Mary and Steven Ramirez argue that they should, instead, have paid the ultimate price: the ‘corporate death penalty’. American law has been honed over the past century and a half to ensure government has effective tools to fight financial crime and prevent lawlessness in the financial sector, with all the social and political chaos to which it inevitably leads. Governments can pursue criminal charges and imprison individuals responsible for corporate crime; governments can also bar them from ever working again in the financial sector. As for the corporations that commit crimes under human guidance, they can be broken up—put to death, figuratively speaking.
Yet inexplicably, the US government failed to do any of that against the megabanks and corporations responsible for the fraud and other crimes which sparked the 2008 financial crisis. Instead, it bailed out the corporations and allowed guilty CEO’s to walk away free.
The Ramirezes have unleashed a powerful condemnation of government’s weak-kneed response to corporate crime in their impressive new study The Case for the Corporate Death Penalty: Restoring Law and Order on Wall Street. They lay the blame for government’s failure to take effective action squarely on the shoulders of the Obama administration. Previous administrations, whether Democrat or Republican, they note, took at least some of the responsible actions necessary to prosecute financial crimes with the varied tool kit provided by law. Even the Bush administration, which preceded Obama, showed a stronger inclination to prosecute corporate financial crime than did its Democrat successor.
Why? The popular explanation—and the one encouraged by politicians—was that the actors in the financial crisis were ‘too big to fail’; in other words, if government didn’t bail them out and let them off the hook for their crimes, they were so powerful that their failure would have an even worse impact on the American economy.
Nonsense, respond the Ramirezes, and they make quick work disposing of government’s claim. Government and Department of Justice claims that enforcing the law against criminal corporations would damage the economy were made “with little supporting evidence and in defiance of common sense. President Obama claims that while much of the misconduct that occurred during and before the crisis of 2008 was reprehensible, it was not necessarily illegal. These claims are false and can be the product only of an effort to deceive or a grand delusion regarding the nature and costs of financial lawlessness.”
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The two legal scholars spend the bulk of their book presenting evidence revealing the scale of criminality engaged in by the banks and their corporate leadership. There’s no doubt that criminality occurred: the agreements reached between the corporations and US government often included outright admissions of fraud and other crimes. Much of the information presented in the book was collected by Department of Justice officials in the course of investigations; other information was provided by corporate whistleblowers (the courageous acts of several corporate employees who acted as whistleblowers to expose their corporations’ wrongdoings, even in the face of retaliation and reprisals, attests to the fact that not everyone in the corporate world is as corrupt as the leadership at the top would cause one to believe).
The authors examine several of the key illustrative cases: the toxic subprime loan schemes of Countrywide Financial; the mortgage-backed securities fraud of Wall Street megabanks like Citigroup, JPMorgan Chase, and Bank of America; the complicity of credit rating agencies like S&P and Moody’s that participated in the megabanks’ fraud; the securities fraud of the world’s fourth largest investment bank Lehman Brothers and the complicity of Ernst & Young’s (E&Y) auditing in their fraud; and the mortgage-related securities fraud of AIG and Goldman Sachs. They more briefly touch on other cases as well. What emerges is a clear image of the horrifying scale of lawlessness and criminality run rampant in the American financial sector.
Too Big to Fail? Or Too Big to Jail?
In response to claims that letting corporate criminals off the hook was necessary to save the economy, they counter that it’s not the death of criminal corporations, but the American government’s failure to enforce the law, which truly threatens the American economy. The problem is captured clearly and succinctly:
No economy can prosper without sturdy rule of law applicable to all economic actors, and granting indulgences to the most powerful in no way serves economic growth and stability. On the contrary, when a lawless class holds sway over massive resources, greater distortions will result as more capital flows into more financial crime… If financial crimes pay, then we should not expect our financial sector to allocate capital to those with new ideas of profitable business plans. Such legitimate capital projects will instead need to compete with the more profitable allure of financial fraud, money laundering, and other larcenous behavior.
Instead of prosecuting the guilty corporations properly, government instead accepted billions of dollars in fines. Not only did this allow the guilty parties to stay in business, but it meant that those who suffered were largely innocent shareholders, while corporate officers who masterminded the crimes got to walk away with the hundreds of millions of dollars they’d pocketed. Former Lehman’s CEO Richard Fuld, who claimed ignorance of his company’s fraudulent activities despite strong evidence to the contrary, certainly isn’t hurting for his role in the scandal, as the authors observe.
Whether one believes the whistleblower who claims that Fuld took in over $500 million in compensation between 2000 and 2007 or Fuld’s testimony before Congress claiming about $300 million, Fuld continues to enjoy a comfortable standard of living (Sterngold 2010). The Center for Public Integrity reported that former Lehman CEO Fuld now operates a financial consulting firm. Moreover, Fuld maintains an $8 million home in Greenwich, Connecticut, and a 40-acre ranch in Idaho. Fuld transferred a $10 million Florida property to his wife in 2008, and the Fulds reportedly sold their Park Avenue apartment for $25 million (Fitzgerald 2013).
Should people like this be in prison instead of enjoying multi-million dollar prosperity and prestige within the financial world? Should they be barred by law from participating in the financial sector? The Ramirezes emphasize that their research doesn’t substitute for a criminal trial, which is the only way of indisputably proving criminal guilt. But their point is that the public was deprived of the right to have such individuals tried in the criminal justice system because of deals struck by government agents which prevented (protected, arguably) such people from facing the rigours of justice and criminal trial.
What happens when you put a corporation to death? Nothing all too bad, note the Ramirezes. In fact, breaking up corporations has historically been shown to have an invigorating and positive effect on both the economy generally as well as shareholders’ interests.
[F]orcing spin-offs of regulated subsidiaries to the shareholders of the megabanks would give shareholders ownership in smaller, more competitive businesses. The businesses would also enjoy the benefit of superior, well-incentivized management that would follow the law instead of using shareholder money to buy off the government for managerial immunity. So the corporate death penalty in the financial sector harms only the managers of the criminal megabanks. Job losses for other than criminal managers are not necessary…
Even government’s thinly justified desire to keep megabanks intact doesn’t explain their refusal to prosecute bank managers and leadership for their crimes. Jailing criminal bankers doesn’t hurt the financial institutions they headed. An argument could be made that prosecuting the leadership of the country’s banking system could cause a loss of confidence in American financial institutions, but as the Ramirezes point out, allowing criminal bankers to get away with their crimes is likely to have a worse effect on investor and consumer confidence. If the world gets the impression that America allows its wealthy to break the law, confidence in American economic institutions will rapidly vanish.
Employment in the financial sector would not be affected, however—breaking up banks would not eliminate jobs since lower-level employees would remain employed by the spin-off companies thereby produced, and eliminating criminal bankers would open spaces for more honest and reliable employees to advance. There’s no benefit to preserving megabanks, argue the Ramirezes, especially when it means allowing them to flout the law.
The megabanks offer no offsetting economic benefit. Their operations are far-flung and complex, making them too big to manage. They also suffer from perverse incentives regarding risk because their government backing means they do not bear the full consequences of excessive risk. Without the massive government subsidy, only small, if any, operating efficiencies would remain… These distorted incentives also mean the megabanks are far more inclined toward criminality and other misbehavior. The increasing criminality associated with megabanks’ business model leads to ever higher legal expenses… In sum, the huge subsidy these megabanks enjoy is a total waste of taxpayer funds that serves only to entrench financial elites and encourage further criminality.
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