When Is Punishment Real?

When the government fines banks hundreds of millions of dollars, it looks like it is getting really tough with them. But as Andrew Ross Sorkin pointed out recently in The New York Times, it’s a bark with no bite: He quotes a professor of securities law at Columbia Law School, on JPMorgan’s “record fine” of $920 million: “This is a case where the victims are the shareholders.”

It’s the illusion of justice, a form of theatre. Government lawyers look as if they are pursuing and punishing wrong-doers. The banks look as if they are acknowledging their wrongs. The public gets to feel that something is being done, while the fines pile up in the Treasury Department to fund further investigations. But there is little incentive in the unfolding drama to actually change anything.

Worse, according to Sorkin: the settlement begins to look a lot like bribery — to some degree, on both sides. The Columbia law professor noted that without a strong case against any individuals, the S.E.C. looks as if it held the firm for ransom. And on the other side, the firm’s senior management appears to have bribed the S.E.C., using shareholder money, not to bring cases against individuals. (See “As JPMorgan Settles Up, Shareholders Are Hit Anew.”)

Not a pretty picture – or a clear one. This makes it more difficult to imagine where the support is going to come from for meaningful reform. The theatrical performances obscure the real sources of blame.

To be sure, it would be a lot harder to convict bank officials of malfeasance, as the standard of evidence would be much higher in a criminal case. The banks must reason that it is easier and cheaper for them to plead guilty to prosecutors’ allegations, especially when it’s just money. They have plenty of that, and as Sorkin pointed out they can easily pass on the cost.

One might argue that in exacting such fines, the S.E.C. is leaving it up to the banks themselves to punish those responsible by firing them, reassigning them, cutting bonuses, or in other ways removing them from responsible positions where they could continue their bad behavior.

But as Slate recently pointed out that does not seem to be happening. JPMorgan’s legal woes under Jamie Dimon’s leadership “includes a total of $3.68 billion in cases already settled for foreclosure irregularities, illegal manipulation of electricity markets, ripping off credit card customers, and compliance failures at four different regulatory agencies relating to the billions in losses on the London Whale trade. [And] those fines are small compared to the $11 billion settlement the bank could be facing related to mortgage abuses during the crisis years. And then there’s a Libor manipulation investigation, violations of the Foreign Corrupt Practices Act, manipulation of a corporate bond index, an obstruction of justice investigation, and even potentially some involvement with the Madoff ponzi scheme.” And yet recent shareholder efforts to limit Dimon’s control at Chase have failed. (See, “How Jamie Dimon’s Getting Away With It.”)

Chase is making just too much money. They are being slapped on the wrists, while real reform of the banking industry languishes.

The underlying issues are being discussed on the back pages of The Times and elsewhere, but is not likely to reach enough people or generate the outrage required for significant action. Wall Street understands it well enough, but they are the last ones to want reform.