Financial Fraud

More and more people are noting that when banks and other financial firms settle charges of fraud and pay out large sums of money as fines, it’s their customers who end up paying the bill.  Worse, those actually responsible pay no penalty at all.

Britain’s Chancellor of the Exchequer, George Osborne, commenting recently on Barclay’s settlement over its manipulation of the Libor rate, went so far as to say, “Fraud is a crime in ordinary business; why shouldn’t it be so in banking?”

A similar thought was expressed by Senator Jack Reed, chairman of a subcommittee that oversees securities regulation in the U.S.: “A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed.”

These are not the words of ordinary people, of course.  They know the reason is that it is far easier to get a bank to pay a fine than to get a conviction in a court of law.  Moreover, the fines are a kind of public confession that does something to appease public outrage, and may even make the firms more cautious in the future especially as the fines help to pay for on-going investigations.  Still, the fact that such prominent figures are speaking up now suggests that it is time to take the next step and actually prosecute the responsible individuals.

As The New York Times pointed out recently:  “The difficulties of prosecuting executives were highlighted last week . . . where a federal grand jury acquitted a Citigroup manager who had been involved in selling an exotic financial security involving residential mortgages . . . and failing to disclose that Citigroup was betting against the investment.”

“In a rare move, though, the jury sent a note to the Securities and Exchange Commission after reaching its decision, urging the agency not to give up. ‘This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary.’”  (See, “Corporate Fraud Cases Often Spare Individuals.”)  The evidence for conviction may have been lacking, but clearly the jurors felt the outrage.

Simon Johnson, former chief economist of the IMF, noting that financial firms are losing their legitimacy, asked some unusually pointed questions for a mainstream economist:  “Do you really believe the increasingly dubious notion that megabanks, as currently constituted, are good for the rest of the private sector, and thus for economic growth and job creation? Or do you begin to consider more seriously the increasingly mainstream proposition that global megabanks and their leaders have simply become too powerful and dangerous?”

He points out that “the big showdowns between democracy and big bankers are still to come – both in the United States and in continental Europe. On the surface, the banks remain powerful, yet their legitimacy continues to crumble.” (See, “Finance’s Crisis of Legitimacy.”

This is the step-by-step erosion of belief and support that inevitably precedes collapse.  It might take just one more scandal.