The Giant JPMorgan Fine Punishes the Wrong People

Government fines affect shareholders or employees, not the executives truly culpable for wrongdoing.

Jamie Dimon, chief executive officer of JPMorgan Chase, testifies before the Senate Banking Committee on June 13, 2012.
National Journal
Catherine Hollander
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Catherine Hollander
Oct. 24, 2013, 5 p.m.

The JP­Mor­gan Chase set­tle­ment this week — the bank is tent­at­ively set to pay the U.S. gov­ern­ment $13 bil­lion for faulty mort­gage prac­tices in the run-up to the 2007 fin­an­cial crisis — is the biggest set­tle­ment ever reached between a single com­pany and the gov­ern­ment, mak­ing up nearly half last year’s in­come for the bank. It may be a blue­print for pun­ish­ing oth­er Wall Street gi­ants, and hold­ing an in­sti­tu­tion ac­count­able for bad loans that caused the re­ces­sion has a cer­tain cath­artic feel. Prob­lem is, little hard evid­ence shows that such set­tle­ments de­ter bad be­ha­vi­or — and an­ec­dot­al evid­ence says they don’t.

Us­ing set­tle­ments as a de­terrent has two big short­com­ings: First, they usu­ally af­fect share­hold­ers, not the culp­able em­ploy­ees. This can be ef­fect­ive if the share­hold­ers are gal­van­ized to de­mand changes at the bank, but that’s hard to ac­com­plish in firms like JP­Mor­gan and its peers, which have large and di­verse share­hold­er groups that don’t al­ways co­alesce around a single goal.

Second, there’s the ques­tion of size. Thir­teen bil­lion dol­lars is a re­cord, but no one’s talk­ing about the end of JP­Mor­gan. In 2008, Ger­man en­gin­eer­ing firm Siemens paid fines total­ing $1.6 bil­lion for brib­ing for­eign gov­ern­ment of­fi­cials to the tune of $1.4 bil­lion (pre­sum­ably not at a 1:1 ra­tio for the re­wards they got). So, as Gregory Gil­christ, a law pro­fess­or at the Uni­versity of Toledo who has stud­ied banks and crime, ex­plains: A fu­ture ra­tion­al act­or might say, OK, if there’s a 10 per­cent chance we get caught, that $1.6 bil­lion is really more like $160 mil­lion. The equa­tion spits out over $1.2 bil­lion profit for the com­pany.

On the oth­er hand, if pen­al­ties cripple or bank­rupt a firm, there’s a fair­ness prob­lem. Tens of thou­sands of em­ploy­ees lost their jobs when ac­count­ing firm Ar­thur An­der­sen went out of busi­ness in the wake of the En­ron scan­dal. Not all of them helped En­ron ex­ec­ut­ives com­mit fraud, but re­ports at the time said the newly job­less em­ploy­ees of both com­pan­ies struggled to find work due to their firms’ tar­nished repu­ta­tions. It’s a prob­lem of col­lect­ive justice. More than one per­son who works on cor­por­ate gov­ernance and white-col­lar crim­in­al cases made the con­nec­tion in in­ter­views with Na­tion­al Journ­al to the old gun joke: Banks don’t com­mit crimes — cer­tain bankers do.

Leg­al and fin­an­cial-in­dustry ex­perts agree that pur­su­ing in­di­vidu­al em­ploy­ees is a more ef­fect­ive de­terrent. Wil­li­am Black, a white-col­lar crim­in­o­lo­gist who in­vest­ig­ated the sav­ings-and-loan crisis of the 1980s and 1990s, test­i­fied to the Sen­ate Ju­di­ciary Com­mit­tee on Wall Street fraud in 2010: “Only pris­on sen­tences can de­ter the vi­ol­a­tions that caused the de­bacle.” That and reg­u­la­tion are the best ways to im­pede white-col­lar crim­in­als who use per­verse in­cent­ives to “twist “¦ private mar­ket dis­cip­line in­to an im­mor­al force that harmed mar­kets.” Yet the Justice De­part­ment and the Se­cur­it­ies and Ex­change Com­mis­sion have rarely pur­sued top of­fi­cials in the wake of the re­cent fin­an­cial crisis.

An ex­ample from the past sug­gests that gov­ern­ment of­fi­cials can scare Wall Street straight with the threat of hard time. In­vest­ment firm Drexel Burnham Lam­bert col­lapsed in 1990 un­der in­vest­ig­a­tions in­to its work in the junk-bond mar­ket. The $650 mil­lion SEC set­tle­ment re­moved Mi­chael Milken, the head of the firm’s high-yield and con­vert­ible-bonds de­part­ment, from power. He was later sen­tenced to 10 years in pris­on. “The SEC was more feared [after that],” says John Cof­fee, a Columbia Uni­versity law pro­fess­or who stud­ies white-col­lar crime. “For a peri­od of time, we saw in­sider trad­ing as be­ing seen as very dan­ger­ous be­ha­vi­or — ca­reer-end­ing.”

The prob­lem is that fin­an­cial trans­ac­tions can be tough to comb through, and prov­ing an in­tent to do wrong in a sea of emails and trans­ac­tions is still harder. The num­ber of pages of evid­ence in the di­git­al age can run to the mil­lions — dif­fi­cult for even an en­tire law firm to look over, page by page. For agen­cies look­ing to hold someone ac­count­able, and quickly, it’s easy to see why they go for lower-hanging fruit (one prom­in­ent ex­ample is Fabrice “Fab­ulous Fab” Tourre, a bond trader at Gold­man Sachs who was found li­able this sum­mer for fraud) or skip this step al­to­geth­er.

Cru­cially, the tent­at­ive set­tle­ment with JP­Mor­gan leaves the door open to crim­in­al con­vic­tions. But for now, per­haps the hap­pi­est pos­sib­il­ity is that the set­tle­ment changes the cul­ture at JP­Mor­gan and bey­ond. Spokes­men for Cit­ig­roup and Gold­man Sachs de­clined to com­ment on wheth­er gov­ern­ment pacts like JP­Mor­gan’s af­fect the way their firms look at risk or com­pli­ance. But when HS­BC was un­der in­vest­ig­a­tion for money laun­der­ing last year, it im­ple­men­ted changes in its com­pli­ance de­part­ment, which were item­ized in the de­ferred pro­sec­u­tion agree­ment filed in Decem­ber. It’s a de­fens­ive move for the banks, but it makes a dif­fer­ence. 

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