Category: Finance

Greek Journalist Acquitted

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Costas Vaxevanis, who was persecuted prosecuted for publishing a list of Greeks with large Swiss bank accounts, has been acquitted:

A Greek journalist who published the names of more than 2,000 of his compatriots who held Swiss bank accounts was acquitted on Thursday in a case that touched a nerve over the role of tax evasion in the country’s debt crisis.

The trial of Costas Vaxevanis, editor of the weekly Hot Doc magazine, had aroused international concern and intense interest among Greeks hit by the impact of the country’s economic collapse and angry at the privileges of the elite.

He could have faced up to two year years in prison on charges of violating data privacy laws that Vaxevanis said were politically motivated and the result of politicians protecting an “untouchable” wealthy class.

His speedy arrest and trial following publication of the “Lagarde List” at the weekend – so named for Christine Lagarde, the head of the International Monetary Fund – touched a nerve in near-bankrupt Greece, where rampant tax evasion is undermining a struggle to cut public costs and raise revenue under an EU/IMF bailout deal.

It also enraged many who are already furious over the failure of consecutive governments to crack down on the rich while years of recession have wiped out a fifth of economic output and hammered middle-class living standards.

As the old saying goes, “A fish rots from the head.”

Former IMF chief economist Simon Johnson notes, in situations like this, the first priority really has to be breaking the grip of the corrupt elites has over society and over the economy.

That is not going to happen, because the Greek leadership is incapable of doing this, and the corrupt elites in the rest of the EU do not want someone telling regulators where the bodied are buried.

It’s Bank Failure Friday!!!

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It’s been a pretty busy week.

First, the FDIC insured institutions. Here they are, ordered, and numbered for the year so far.

  1. Heritage Bank of Florida, Lutz, FL
  2. Citizens First National Bank, Princeton, IL

Full FDIC list

Also, we had 3 credit union closings:

  1. ​U.S. Central Bridge Corporate Federal Credit Union, Lexana, KS
  2. El Paso Federal Credit Union, El Paso, TX
  3. Women’s Southwest Federal Credit Union, Dallas, TX

Note that the U.S. Central Bridge Corporate Federal Credit Union is a corporate credit union, which means that they are a credit union for the consumer credit unions, which serve the public, and provide services like account clearing and liquidity, so it’s kind of a big deal.

Full NCUA list

So, here is the graph pr0n with last years numbers for comparison (FDIC only):

Pass the Popcorn

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A court has ruled that the Montgomery County (PA) Recorder of Deeds can sue MERS (Mortgage Electronic Registration Systems) and the banks over their evading recording fees:

The federal court has upheld the Montgomery County Recorder of Deeds’ right to sue an electronic mortgage registry company and banks doing business with that company for $15.7 million that she claims is owed to the county in recording fees.

 The court Friday issued a 36-page memorandum and order denying a motion by MERS, also known as Mortgage Electronic Registry System, and its participating banks to dismiss the lawsuit filed last year by Recorder of Deeds Nancy J. Becker.

 The court’s ruling, while not discussing the merits of the case, essentially states that Pennsylvania does have a law requiring that mortgage assignments be recorded with the recorder of deeds office and that the recorder of deeds has the right to bring legal action when he or she does not believe an entity is complying with the law.

 “This is one major hurdle that we have now leaped,” Becker said Monday. “Now, we can move forward on the issues.”

………

 Some 146,715 MERS mortgages have been recorded in her office from April 2004 through September 2011, according to Becker.

146,715 mortgages?  In one county?

Well Montgomery County has about 800K people, or about ¼% of the US population.

If you assume a lower number of multi-family residences, and double it, you have something in the neighborhood of 30 million mortgages, and fee evasion on the order of $3 billion.

With penalties, it might be north of $10 billion, and when you consider the potential liabilities that the banksters might have incurred because MERS did not work, and does not provide an accurate (or for that matter legal) record of who holds the note on the loan:

Becker has said that, when these mortgage loans are transferred electronically, sometimes multiple times, through MERS and not filed in the county recorder of deeds office, “it makes it difficult, almost impossible sometimes” for property owners to determine what institutions are holding their mortgages.

I would be very surprised if the liabilities incurred by this are not hundreds, if not thousands, of times more.

Why Hasn’t Jon Corzine Been Indicted?

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The Wall Street Journal notes that there were no effective capital controls or accounting standards at MF Global:

As MF Global Holdings Ltd. teetered last October, an accountant in its Chicago office got an urgent question from regulators: How much cash did the firm have left?

 It is supposed to be an easy question for brokerage firms to answer, even in the middle of a crisis. U.S. rules set tight controls on the accounting, oversight and movement of money that belongs to customers or firms themselves.

 This will require a significant effort,” the MF Global accountant, Matthew Hughey, wrote in an email to seven colleagues at 4:24 a.m. on Oct. 27, 2011. A copy of the email was reviewed by The Wall Street Journal.

 The reason Mr. Hughey couldn’t answer the question for regulators: Employees at MF Global couldn’t keep track of exactly how much money it had at any given moment, even before the company began to wobble, according to Mr. Hughey’s email. Officials had been trying to fix the problem for months.

 As regulators and lawmakers plow ahead with investigations that began when MF Global tumbled into bankruptcy a year ago this week, yawning gaps in the New York company’s procedures for moving and keeping track of money are getting new attention.

 A private lawsuit expected to be updated early next month is expected to highlight such issues and how they are tied to the more than $1 billion that went missing from customer accounts as MF Global failed last October, according to people involved in the suit.

 A House financial services committee report, which will be released in the next few weeks, is expected to scrutinize how regulators handled MF Global. It is unclear how much focus will be given to the deficiencies in internal computer systems and procedures at the firm.

………

There are no signs that prosecutors are planning to bring criminal charges related to the firm’s demise.

Jon S. Corzine and Henri J. Steenkamp, MF Global’s chief executive and finance chief, respectively, have told lawmakers that they believed internal controls at the company were sound when they signed securities filings in 2011. Their signatures were required under the Sarbanes-Oxley corporate-governance law.

Mr. Corzine, a former Goldman Sachs Group Inc. chairman, strongly backed the 2002 law while he was a Democratic U.S. senator from New Jersey. He has repeatedly denied any wrongdoing related to MF Global. A spokesman for Mr. Corzine declined to comment Sunday. Mr. Steenkamp’s lawyer and Mr. Hughey couldn’t be reached for comment. A lawyer for Mr. Hughey declined to comment.

(emphasis mine)

Under Sarbanes Oxley, Jon Corzine personally certified that MF Global had established and was maintainied “internal controls” and “designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared.” (From the Wiki)

The didn’t. It wasn’t even close, and Jon Corzine was in violation of the law, and should be subject to criminal penalties.

What have we heard from the Department of Justice? **crickets**

It is a disgrace.

I Think that David Stockman Just Called Rmoney a C%$# Sucker

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I don’t think that Reagan’s former budget director finds Mitts business experience particularly meritorious:

Bain Capital is a product of the Great Deformation. It has garnered fabulous winnings through leveraged speculation in financial markets that have been perverted and deformed by decades of money printing and Wall Street coddling by the Fed. So Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.

Nevertheless, Mitt Romney claims that his essential qualification to be president is grounded in his 15 years as head of Bain Capital, from 1984 through early 1999. According to the campaign’s narrative, it was then that he became immersed in the toils of business enterprise, learning along the way the true secrets of how to grow the economy and create jobs. The fact that Bain’s returns reputedly averaged more than 50 percent annually during this period is purportedly proof of the case—real-world validation that Romney not only was a striking business success but also has been uniquely trained and seasoned for the task of restarting the nation’s sputtering engines of capitalism.

Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

It’s pretty long, but it’s well worth the read, and it is positively devastating.

But It’s Not Happening Here

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It looks like the rest of the industrial world is seriously address the risks and effects of high frequency trading:

After years of emulating the flashy United States stock markets, countries around the globe are now using America as a model for what they don’t want to look like.

Industry leaders and regulators in several countries including Canada, Australia and Germany have adopted or proposed limits on high-speed trading and other technological developments that have come to define United States markets.

The flurry of international activity is particularly striking because regulators have been slow to act in the United States, where trading firms and investors have been hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August by Knight Capital that cost it $440 million in just hours. While the Securities and Exchange Commission is hosting a round table on the topic on Tuesday, the agency has not proposed any major new rules this year.

Here is the kicker, unlike the claims of the HFT mafia, it turns out that markets run better when they have limits placed on them:

The broadest and fastest changes have come out of Canada, where this spring regulators began increasing the fees charged to firms that flood the market with orders. The research and trading firm ITG found that the change had already made trading more efficient by reducing the crush of data burdening the market’s computer systems.

Now Canadian trading desks are preparing for rules that will come into effect on Oct. 15 and curtail the growth of the sophisticated trading venues known as dark pools that have proliferated in the United States. While the regulation has been hotly debated, many Canadian bankers and investors have said they don’t want to go any further down the road that has taken the United States from having one major exchange a decade ago to having 13 official exchanges and dozens of dark pools today.

It’s time to realize that most financial innovation is not an advance in the art, but rather an exercise in fraud and rent seeking, and we need to stop it.

No Prosecutions of Banksters, People are Finally Noticing

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At least the reporters at McClatchy are noticing:

Running for re-election, President Barack Obama frequently blames Wall Street and the deep financial crisis it caused for the underperforming economy. He doesn’t advertise that no major honcho of finance has been jailed under his watch for the mess, however.

The lack of a high-profile arrest and trial is all the more surprising given that Obama has tried to stain his Republican rival, former Massachusetts Gov. Mitt Romney, as a creature of Wall Street.

Past financial crises have always had antagonist. The savings and loan crisis of the late 1980s had banker Charles Keating. The CEO of collapsed energy trader Enron, Kenneth Lay, became the face behind a drive to revamp accounting laws in 2002. Both men were prosecuted for and convicted of financial crimes.

In the aftermath of the financial crisis of 2007-08 and the subsequent Great Recession, there’ve been plenty of scapegoats but no important actor fitted for pinstripes.

Why not? There’s no single compelling answer to that question.

“Some people (in regulatory agencies) believe that the folks at the Treasury and the Fed felt that pursuing chief executive officers would delay the economic recovery and continue to destabilize the financial system,” said John Coffee, a Columbia University law professor who frequently testifies before Congress on securities law. “They had that point of view. Whether they had any influence over the Department of Justice is very uncertain.”

Yeah, very uncertain.

The issue is not the influence of the Treasury Department over the Department of Justice.

Not prosecuting is the official policy of the President.  His response to wrongdoing whenever someone connected (CIA torturers and Dick Cheney) or powerful (banksters) is to say that he will “look forward, not back.”  (But he’s going balls to the wall prosecuting medical marijuana).

Whether Treasury has influence does not matter.  This is the a directive from Potus.

As an aside, McClatchy was just about the only major US news org to treat the run up to Iraq with any skepticism.

What I want, and what a solid majority of Americans want, is some bankster heads on a pike.

Least Surprising Data Point: Of The Day

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Using OCC data, the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency, the Columbia Business School, Ohio State University, and the University of Chicago crunched the numbers to find the number of unnecessary foreclosures, and 800,000 homes were foreclosed on that should not have been:

But while evidence of these problems was pervasive, it was always hard to quantify the damage. Just how many more people could have qualified under the administration’s mortgage modification program if the banks had done a better job? In other words, how many people have been pushed toward foreclosure unnecessarily?

A thorough study released last week provides one number, and it’s a big one: about 800,000 homeowners.

 The study’s authors — from the Federal Reserve Bank of Chicago, the government’s Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government’s main foreclosure prevention program.

What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained.

 Unfortunately for homeowners, most mortgages are handled by banks that haven’t been properly staffed and thus have modified far fewer loans. If these worse-performing banks had simply modified loans at the same pace as their better performing peers, then HAMP would have produced about 800,000 more modifications. Instead of about 1.2 million modifications by the end of this year, HAMP would have resulted in about 2 million.

 That’s still well short of the 3-4 million modifications President Obama promised when he announced the program back in early 2009. But it’s a big difference, and a reasonable, basic benchmark against which to compare the program’s failings.

………

 The report does not identify these poor performing banks, but it’s not hard to ID them. A “few large servicers [have offered] modifications at half the rate of others,” the authors say. The largest mortgage servicers are Bank of America, JPMorgan Chase, Wells Fargo and Citi.

 Bank of America in particular (the largest of all the servicers when HAMP launched) has been far slower to modify loans than even the other large servicers, as other analyses we’ve cited have shown.

These are the banks that we bailed out, either directly, or by bailing out their counter parties, and they responded by f%$#ing home owners, and by extension, the the real estate market and the entire country.

This is why not prosecuting the banksters was such a bad thing.  People who know that they have impunity, and know it, it does not produce ethical, or competent, behavior.

Dodd Frank is Working

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Not.

Case in point, the new clearinghouses are allowing for “collateral transformation” which serves to once again misstate counter-party risk to the detriment of society and the markets:

More obviously troubling was a Bloomberg story on how major financial firms are going to undermine the effectiveness of clearinghouses by engaging in “collateral transformation”:

Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.

The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.

Understand what is happening here: clearinghouses are one of the major elements of Dodd Frank to reduce counterparty risks. But the banks are proposing to vitiate that via this “collateral transformation” which will simply create new, large volume counterparty exposures to deal with fictive clearinghouse risk reduction program. And get a load of this:

U.S. regulators implementing the rules haven’t said how the collateral demands for derivatives trades will be met. Nor have they run their own analyses of risks that might be created by the banks’ bond-lending programs, people with knowledge of the matter said. Steve Adamske, a spokesman for the U.S. Commodity Futures Trading Commission, and Barbara Hagenbaugh at the Federal Reserve declined to comment

Translation: the regulators are aware of the banks’ plans to finesse the clearinghouse requirements, and they neither intend to put a kebosh on it (which could easily be done by taking the position that any collateral transformation to meet clearinghouse requirements was an integrated part of the clearinghouse posting and could not be done separately on bank balance sheets) nor understand the impact of their flatfootedness.

The problem is that with complexity (“Innovation”) does not create benefits as much as it creates opportunities for fraud. (Saroff’s rule restated)

The problem is that finance lends itself to the selling of snake oil even more than does the sale of patent medicine, and the excesses of patent medicine, most notably Radithor, led to the requirement that medications be proven safe and effective before being foisted off on the public.

We need the same policy for financial instruments.

Hun, Some of Rmnney’s Tax Evasion Was Pretty Simple

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Basically, he took management fees and converted them to carried interest, in order to secure the lower capital gains rate:

Two and Twenty. Private equity fund managers are compensated in two primary ways: management fees and carried interest. The management fee, traditionally two percent annually, is paid to the managers to cover overhead, salaries, and so forth. The carried interest, traditionally twenty percent, is a share of the profits from the underlying investments. My paper Two and Twenty described the typical arrangement. Management fees are taxed at ordinary income rates; carried interest is often taxed at capital gains rates. I focused in the article on why the carried interest portion is better viewed like bonus compensation and should be taxed at ordinary income rates.

Management Fee Conversion. Current law on carried interest is already a sweetheart tax deal for private equity, but why not make it better? Private equity folks are not the type to walk past a twenty-dollar bill lying on the sidewalk. In the 2000s it became common for private equity fund managers to “convert” their management fees into carried interest. There are many variations on the theme, but here’s how many deals worked: each year, before the annual management fee comes due, the fund manager waives the management fee in exchange for a priority allocation of future profits. There is minimal economic risk involved; as long as the fund, at some point, has a profitable quarter, the managers get paid. (If the managers don’t foresee any future profits, they won’t waive the fees, and they will take cash instead.) In exchange for a minimal amount of economic risk, the tax benefit is enormous: the compensation is transformed from ordinary income (taxed at 35%) into capital gain (taxed at 15%). Because the management fees for a large private equity fund can be ten or twenty million per year, the tax dodge can literally save millions in taxes every year.

The problem is that it is not legal. Because the deals vary in their aggressiveness, there is some disagreement among practitioners about when it works and when it doesn’t. But in my opinion, and the opinion of many tax practitioners, the practices that were common in the private equity industry in the 2000s became very, very questionable, and it’s unlikely that they would have stood up in court.

Tax attorney and professor Victor Fleischer does the dumpster diving in Gawkers Bain document dump and this is the first bit of specific skulduggery that I’ve seen as a result.

Not Enough Bullets…

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One of the largest food trading firms in the nation is bragging about how drought and food shortages will make them lots of money:

Every so often a business titan forgets himself, drops his guard and tells us what he’s really thinking.
So it was that a big cheese at the world’s largest commodities trader bragged that the worst drought to hit the US since the 1930s – and the worrying volatility in food prices around the world – will be “good for Glencore”.
On one reading, Chris Mahoney, the business titan in question, appeared to be celebrating the destruction of 45 per cent of America’s corn and 35 per cent of its soya bean crops this year. The crisis threatens to push cereal prices to a new record in a move that will put further pressure on the world’s poorest people and raises the prospect of a fresh round of food riots.
Mr Mahoney’s comments have put the spotlight firmly back on food prices, which rose by an average of 6 per cent globally in July, while cereals accelerated considerably faster still, jumping by 17 per cent to within a whisker of their record in April 2008, according to the UN.
“The US weather starting mid-May…has been among the worst three or four years of the century, comparable to the dust bowl years of the mid-30’s,” said Mr Mahoney, Glencore’s head of agriculture, suggesting that it won’t be long before cereal prices hit a new record.
“In terms of the outlook for the balance of the year, the environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities [the sale and purchase of an asset to profit from price differences in different markets],” he added.

The usual suspects were suitably appalled, but as Concepcion Calpe of the UN Food and Agriculture Organization noted, it won’t happen because agribusiness in general, and Glencor in particular, “Know this and have been lobbying heavily around the world to water down and halt any reform.”

Our economy is run by and for sociopaths, and they control our food.

Read this Series

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Naked Capitalism is doing a series analyzing private equity, and their first article, which explains how private equity exists solely through a massive infusion of government money:

This is the first in a series of postings on the private equity industry (“PE”) and will serve as an introduction to private equity investing.

Private equity practitioners, including most famously Mitt Romney, often depict their sector as the epitome of private enterprise. These claims are false. Private equity firms not only depend directly and substantially on government support, they have also actively cultivated links to the state.

Some readers may know that private equity relies heavily on tax subsidies. Private equity firms engage in debt-leveraged buyouts of public and private companies, and the interest charges on this debt are tax deductible. But most members of the public do not know that close to half the investment capital in private equity funds is contributed directly by government entities. In this respect, private equity is little different than companies like Fannie, Freddie, and Solyndra that are regularly criticized in the media as recipients of government subsidies.

Their decisions to invest government funds in private equity reflect assumptions by government officials that have gone unchallenged and, we contend, are quite likely incorrect. Moreover, virtually all of the important details of the private equity investments made by these state investors are kept secret at the insistence of PE firms, in striking contrast to every other type of government contract.

………

This is not surprising.

Private equity, even when compared to hedge funds, are remarkably opaque, with no prospectus, and little information given to investors.

Even the payoff date is not revealed to investors.

Of course for a public pension manager, they will be gone when it all turns to sh%$.

They’ll probably working for a private equity fund.

If you are investing other people’s money (as in the contributions of state employees) and someone lies to you about possible return on investment, and this would allow your bosses in the governors’ mansions and the state houses to balance the budget, you are inclined to be quite credulous.

Time to Keep Your Cash in Your Mattress

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In a ruling from the failure of a brokerage in 2007, a court has ruled that segregated client funds can be used by the firm for as collateral, and the bank gets priority for the clients’ money:

A ruling in the case of failed futures brokerage Sentinel Management Group could make it more difficult for customers to recoup money lost in the much larger collapse of MF Global, according to Sentinel’s bankruptcy trustee.

A federal appeals court on Thursday upheld a ruling that puts Bank of New York Mellon ahead of former customers of Sentinel in the line of those seeking the return of money lost in the 2007 failure of the suburban Chicago-based futures broker.

The appeals court affirmed an earlier district court ruling that the bank had a “secured position” on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money.

Futures brokers are required to keep customers’ funds in dedicated accounts to protect them from being used for anything other than client business.

However, Thursday’s ruling suggests that brokerages can use customer funds to pay off other creditors, Sentinel trustee Fred Grede told Reuters.

“I don’t think that’s what the Commodity Futures Trading Commission had in mind” with its requirement that brokers keep customer money separate from their own, he said.

“It does not bode well for the protection of customer funds.”

Worse, Grede said, is that the ruling suggests that a brokerage that allows customer money to be mixed with its own is not necessarily committing fraud.

That may raise the bar for proving that MF Global Holdings Ltd, under then-CEO Jon Corzine, misused customer funds as it scrambled to meet margin calls to back bets on European debt in the brokerage’s final days. A $1.6 billion customer shortfall remains.

………

Customer funds were allegedly moved from the protected accounts to other accounts so they could be used as collateral for loans to Sentinel’s own trading operations.

The appeals court said that “perhaps the bank should have known that Sentinel violated segregation requirements” but agreed with the district court’s earlier ruling that “such a lack of care does not rise to the level of the egregious misconduct” needed to reprioritize a claim.

“That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted ‘with actual intent to hinder, delay, or defraud’ its customers,” U.S. Circuit Judge John D. Tinder wrote in the ruling.

If you have your money in an account, the firm can steal it and use it for loan collateral, and the bank gets it all.

For ordinary people who, for example, simply get a good deal on a used car that later turns out to have been stolen, they have to give the car back, even though they had no reason to know that he car was stolen.

But for the banks, if they are willfully blind,  they get to keep the stolen property, because the law does not apply to them.

We need to end this sh%$.  My next post discusses what would work, but ever won’t be done by either the current administration, or by a possible Romney administration.

Just Lock Them Up

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Giancarlo Spagnolo, a professor at the University of Rome, makes a rather appealing suggestion, that we start criminally charging the banksters:

Recent revelations on traders’ behaviour in the Libor rigging case are worrisome not only as a sign of the rotten culture of financial operators, but also for the sense of legal impunity prevailing among them (Economist 2012). They suggest that bank CEOs and supervisors may have tolerated or encouraged rate rigging, or negligently lost control of banks’ operations, for years. They also indicate that law enforcement has been extremely weak in the realm of banking and finance. The recent allegations that some large UK banks have been involved in extensive money-laundering activities in favour of Mexican drug cartels and Iran reinforce this impression considerably.

In the light of these revelations, on 25 July the European Commission amended its proposal for a Regulation and a Directive on insider dealing and market manipulation to include criminal sanctions against that type of price fixing. Meanwhile, following a report by the FSA on the failure of the Royal Bank of Scotland, the UK Treasury had already opened a consultation on how to introduce criminal sanctions against failed banks’ directors, ranging from automatic debarment to full fledged prison for extreme reckless behaviour.

The need for tougher sanctions is self-evident, as is the need to hold accountable negligent regulators. But are criminal sanctions a good remedy for financial misbehaviour? Wouldn’t it be better to substantially increase monetary fines? The question is warranted given that, with few exceptions, modern economists from Becker (1968) onwards regard monetary fines as a more efficient law enforcement instrument than non-monetary criminal sanctions (Polinski and Shavell 2000, Werder and Simon 1986).

The problem with monetary fines is that not always can wrongdoers be fined at a sufficient level to achieve deterrence. Wrongdoers may:

  • Not have sufficient wealth, or may conceal it;
  • Transfer fines to other parties (uninformed shareholders, directors’ insurance funds, etc.); or
  • Be protected by limited liability (for corporate fines).

In the remainder of this column, I will try to clarify why these problems are particularly acute for banks and in particular for bankers, intended as those individuals with inside information and control on the banks’ business (traders, directors, CEOs…). As we will see, the same reasons that for a long time have made banks ‘special’ for competition policy also ensure that to deter bankers’ wrongdoing, non-monetary criminal sanctions are necessary.

As an aside here, the idea of piercing the veil of corporate indemnification, so, for example, income of all forms in excess of (for example) that of the President of the United States, would not be covered by limited liability for a period of a few years.

Prof. Spagnolo does not discuss this, but it should be up there.

If people knew before the fact that if their banks had to bailed out, that all their property could be taken by a court judgement, it would deter them.

As it stands now, the worst case, taking the example of Michael Milken, who did his few years at club Fed, and left still prison fabulously wealthy.

H/t Naked Capitalism.