Bank Fines + Prosecutions = Enforcement

Fining Banks Is Only Half the Job
Since 2008, the U.S. authorities have meted out $87.53 billion in fines to global banks. Some people believe that bankers are finally getting their due, being hit with billion-dollar penalties for their recklessness.
Bloomberg, June 6, 2014

Since 2008, the U.S. authorities have meted out $87.53 billion in fines to global banks. That number comes from data complied by the Financial Times. Some people believe that bankers are finally getting their due, being hit with billion-dollar penalties for their recklessness.

I don’t see it that way; rather, it looks like little more than a belated attempt to walk back the too-big-to jail trial balloon floated by U.S. Attorney General Eric Holder.

To me, this represents a colossal failure on the part of our political leaders, regulators, law-enforcement officials and bankers. I don’t buy the concept that a lack of prosecution or conviction means no crimes were committed any more than I buy that O.J. Simpson’s acquittal means he didn’t murder his estranged wife. Rather, what this lack of criminal prosecution reflects is timidity by prosecutors who seem to have forgotten how to do their jobs.

As an example, consider a list presented to a 2011 conference of the National Association of Attorneys General. There were 10 major areas of bank and mortgage fraud that were identified as ripe for prosecution:

1. Mortgage Electronic Registration Systems

2. Mortgage pools

3. Bad securitization

4. “Misplaced” mortgage notes

5. Force-placed insurance

6. Illegal pyramid servicing fees

7. Document fraud for sale

8. False affidavits, perjury (robo-signing)

9. Foreclosure mills

10. Active military members losing homes while on tour of duty

This is a target-rich environment for any prosecutor who wanted to actually discharge his duties.

What happened instead, as we have detailed too many times before, was that fearful prosecutors were deterred by a non-legal argument made by economists: Prosecution would lead to economic collapse.

What too many people seem to be missing is an understanding of how enforcement of property laws is a prime underpinning of economic development and growth. More than just preventing bad behavior, laws to protect property owners create the fundamental basis for economic activity. As Peruvian economist Hernando de Soto wrote in “The Mystery of Capital”:

In the West, this formal property system begins to process assets into capital by describing and organizing the most economically and socially useful aspects about assets, preserving this information in a recording system—as insertions in a written ledger or a blip on a computer disk—and then embodying it in a title. A set of detailed and precise legal rules governs this entire process. Formal property records and titles thus represent our shared concept of what is economically meaningful about any asset . . . The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system.

In other words, the rule of law matters. It has allowed capitalism to thrive and create enormous wealth. It does more than merely inform bankers what is and isn’t acceptable behavior. These laws exist beyond punishing wrong doers and creating proper incentives. Our entire system of economic progress and well-being is dependent upon a system that has developed over the course of centuries.

What are we to make of a system that ignores its own laws and neglects the legal process? Merely penalizing shareholders for the fraud of their executives puts this nation in danger of sliding not just backward to the 18th century, but slipping toward a third-world-nation status of dubious legal protections and the worst form of cronyism.

The cost of committing crimes should be more than an expensive fine paid by someone else. It should involve jail time. We risk far too much otherwise.

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I originally published this at Bloomberg, June 6, 2014. All of my Bloomberg columns can be found here and here.