Watch a bit of jousting during the hearings on AIG today:
Now one can take the position that Grayson is merely trying to score points, but I don’t see it that way. Instead, he is trying to make a response to a basic and unanswered question:
Who were these people who wrecked AIG and other companies? How did it come about? And was the nature of their actions such that they should be permanently barred from the securities and banking industries?
Now I have said repeatedly the reason no one wants to pursue this line of action is that it is likely to reveal fraud, including at high levels (remember, post Sarbox CEOs and CFOs are now required to certify financial statements) and Team Obama does not want to do anything that would jeopardize confidence in the financial system. But this is completely wrong-headed; the reason there is no trust is the public at large sees considerable evidence of malfeasance. So the confidence is already gone, and an organized process to root out at least the worst instances of rot would be salutary.
Ah, but we don’t take down banksters in this country. The only major case was Mike Milken, who did engage in less than above board behavior (I know someone who joined the firm and resigned at the end of his first day based on what he saw), but Drexel was also shaking up the status quo, so the interests of enforcing the law happened to coincide with the interests of defending the Wall Street establishment.
Why, for instance, wasn’t there an effort to keep the crowd at LTCM from ever setting up a hedge fund again? Given the unregulated nature of hedge funds, that might have been hard to do, but pretty diligent discovery (the fact gathering that happens once a suit has been filed and the defendants are required to respond to prosecution demands for information) would probably have uncovered enough dirt to make it very difficult for them to ever raise money in meaningful amounts again.
Consider Bankers Trust. As far as I am concerned, Proctor & Gamble did not have a case, yet they prevailed (in that they got a very favorable settlement) and wound up bringing down BT. Look at the fact set:
The root cause appears to have been that BT’s clients felt that BT had unfairly exploited their comparative lack of sophistication in handling these sophisticated derivative products. For example, Procter & Gamble (P&G), the client whose case received the most publicity, had entered into complex interest-rate derivatives transactions with the bank. These transactions represented a bet on P&G’s part that U.S. interest rates would remain stable, or decline, over the transaction period. If interest rates rose, however, P&G would lose a substantial amount of money. In addition, P&G made its bets more aggressive by leveraging its positions twenty-to-one.
Levered twenty to one? P&G had a treasury that was punting, not hedging, lost out, and decided to go after BT. Now knowing BT, the derivatives were overpriced (they had a reputation for that sort of thing among dealers), but P&G’s officers also have a duty of care, and buying something they didn’t understand and then gearing it up heavily would seem to run seriously afoul of that.
But P&G hit pay dirt, and unearthed hugely embarrassing tape recordings in fact discussing overpricing and other not so nice behavior towards customers. That pretty much killed BT as a derivatives trader, which had become its core business, and it was acquired by Deutsche Bank.
A serious investigation of LTCM, whether criminal (a creative prosecutor could come up with something that would have passed summary judgment) or Congressional hearings would have been salutary. It would have made it clear that taking undue risk with customer money could do permanent damage to one’s career. But no, making them take what they considered to be inadequate pay to wind down the operation (there was much bitching and moaning on this point,) was deemed sufficient punishment. Now one can argue that LTCM did not have a corrupt culture like BT, but Roger Lowenstein, a mere journalist with no discovery powers, found that in the later days LTCM was punting, taking massive bets in markets where it had no historical data (which is contrary to its sales pitch to investors).
Of course, it isn’t clear whether deterrence works against white collar criminals, but the flip side is William Bratton style zero tolerance policing was successful in seemingly ungovernable New York. The theory was that allowing minor infractions, like window breaking, to go unpunished sent a very visible signal that misdeeds were tolerated. Of course, zero tolerance wasn’t the only technique used by Bratton (he also was big on flexible deployment, shifting officers to neighborhoods that suffered an increase in crime), but it is considered to be an effective policing tool. And Wall Street is so far from having any meaningful policing that it’s a joke.
It seems anything short of regulatory or legal moves that limit career options (read future earning power) is an insufficient disincentive to risky trader and investor behavior.