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I would be fine with "Wells Fargo CEO John Stumpf Ordered to Pay Back Fraudulent Fees to Wells Fargo Clients, Out of Own Pocket" (possibly down to some wealth l

I would be fine with "Wells Fargo CEO John Stumpf Ordered to Pay Back Fraudulent Fees to Wells Fargo Clients, Out of Own Pocket" (possibly down to some wealth limit, say, he can keep the $35K he apparently pays to his employees if his fortune is not enough to restore the damage). I am not a big believer in jail as punishment (as opposed to "place we keep people who are dangerous to others, for the good of society at large"). The remedy to fraud should be a fine, but it should be a fine commensurate with the level of fraud rather than a slap on the wrist and it should affect the people involved, not just get passed down to corporate stockholders (which includes pension funds and the like). I would also be fine with a court injunction banning him from working on banking, again, not as punishment but as "this man can't be trusted by society to handle other people's money". All of this after proper trial, of course. That said, bank CEOs are a Least Concern species when it comes to overuse of punishment in the justice system, so if someone wants to jail them until we decide not to jail many other types of non-violent offenders, well... I am not fighting that one too strongly. I just think that in one way it would be a step in the wrong direction.

carsongross 10y ago
Punishments need to be out of proportion to the financial damages they do when they erode public trust, which is a good held in common (and the key to prosperity in the west). This is why someone who runs a charity scam should be punished more than someone who simply mugs people.
- will_pseudonym 10y ago
  Punishments should always be greater than the financial damages, because otherwise the expected value of fraud will always be positive.
  - lazaroclapp 10y ago
    It depends. Do you consider loss of reputation part of the punishment, or just an additional natural consequence of the fraud? If you want to think like an economist about fraud, in terms of pure monetary cost/benefit (which is not how people, even CEOs, think), then the game is something like this: Every year you can get $X by being honest, or $(X+Y) by committing fraud, you have probability p of being caught every year (assume: independent) and will have to pay $Z if caught, per year you stole $Y. Additionally, because of loss of reputation, you will only be able to earn at most $W honestly afterwards, instead of $X (assume: it won't be possible/reasonable for you to get away with fraud a second time). Thus, so long as i(X+Y-Z) + W(years_of_career - i) < Xyears_of_career any time (1-p)^i > 0.5, fraud is disincentivized. Sure, you can make the model more complex by adding the extra interest of earning an additional $Y early in your career whether or not you can leverage fraud to be promoted, but you still end up with an equation in which being finned and* removed from your position is rarely worth it if: a) the probability of being caught is high, b) the fine is in the ballpark of the damages (Y+\epsilon due to moral damages and legal fees) and c) being found out comes with an extra-legal reputation cost. Also, at the levels we are talking about here, is money anything more than a proxy for ego/reputation? Would you rather have $10 million and be well regarded or $40 million and infamous?
    - crdoconnor 10y ago
      >If you want to think like an economist about fraud You don't. Thinking like an economist about control fraud is the exact mistake Alan Greenspan made when he denied that fraud could exist because an efficient market wouldn't allow it: http://www.dailykos.com/story/2010/11/7/918589/- http://www.dailykos.com/story/2010/11/7/918589/- His fatal assumption was also that reputational risk was enough to prevent it from ever happening.
- lazaroclapp 10y ago
  The question is, does punishment really work as a deterrent in this case? Assume that the penalty for fraud were lifetime prison or even death, but it only ever got applied to 0.1% of the people committing it. I don't think that would deter anyone. But a realistic chance (maybe even 10%) of losing your wealth, career and reputation would. Maybe even that is not needed, and you can build enough transparency into the system that violating trust (game theoretic defecting) becomes worthless compared to other options. My point is, punishment for the sake of punishment is not in our interest. And sure, there is some value in creating a deterrent, but usually there are better ways to set incentives than just coming up with the meanest scariest deterrent you can think of and having that hanging over people's heads.
evanpw 10y ago
Wells Fargo made about $2.5m from the fraudulent accounts, and Stumpf had $40m+ of compensation clawed back.
- lazaroclapp 10y ago
  Were those $40M used to pay back the victims of the fraudulent accounts, reimburse them for the stress, money and time spent fighting those charges and used to restore their creditworthiness, plus to fund the government and press groups involved in uncovering and fixing this mess? If so, I actually see it as a pretty reasonable outcome[1], specially given he is also not in charge there anymore. [1] well... modulo the fact that his compensation sounds surprisingly high to begin with, but that's between him and his stockholders.

carsongross 10y ago

Punishments need to be out of proportion to the financial damages they do when they erode public trust, which is a good held in common (and the key to prosperity in the west). This is why someone who runs a charity scam should be punished more than someone who simply mugs people.

will_pseudonym 10y ago
Punishments should always be greater than the financial damages, because otherwise the expected value of fraud will always be positive.
- lazaroclapp 10y ago
  It depends. Do you consider loss of reputation part of the punishment, or just an additional natural consequence of the fraud? If you want to think like an economist about fraud, in terms of pure monetary cost/benefit (which is not how people, even CEOs, think), then the game is something like this: Every year you can get $X by being honest, or $(X+Y) by committing fraud, you have probability p of being caught every year (assume: independent) and will have to pay $Z if caught, per year you stole $Y. Additionally, because of loss of reputation, you will only be able to earn at most $W honestly afterwards, instead of $X (assume: it won't be possible/reasonable for you to get away with fraud a second time). Thus, so long as i(X+Y-Z) + W(years_of_career - i) < Xyears_of_career any time (1-p)^i > 0.5, fraud is disincentivized. Sure, you can make the model more complex by adding the extra interest of earning an additional $Y early in your career whether or not you can leverage fraud to be promoted, but you still end up with an equation in which being finned and* removed from your position is rarely worth it if: a) the probability of being caught is high, b) the fine is in the ballpark of the damages (Y+\epsilon due to moral damages and legal fees) and c) being found out comes with an extra-legal reputation cost. Also, at the levels we are talking about here, is money anything more than a proxy for ego/reputation? Would you rather have $10 million and be well regarded or $40 million and infamous?
  - crdoconnor 10y ago
    >If you want to think like an economist about fraud You don't. Thinking like an economist about control fraud is the exact mistake Alan Greenspan made when he denied that fraud could exist because an efficient market wouldn't allow it: http://www.dailykos.com/story/2010/11/7/918589/- http://www.dailykos.com/story/2010/11/7/918589/- His fatal assumption was also that reputational risk was enough to prevent it from ever happening.
lazaroclapp 10y ago
The question is, does punishment really work as a deterrent in this case? Assume that the penalty for fraud were lifetime prison or even death, but it only ever got applied to 0.1% of the people committing it. I don't think that would deter anyone. But a realistic chance (maybe even 10%) of losing your wealth, career and reputation would. Maybe even that is not needed, and you can build enough transparency into the system that violating trust (game theoretic defecting) becomes worthless compared to other options. My point is, punishment for the sake of punishment is not in our interest. And sure, there is some value in creating a deterrent, but usually there are better ways to set incentives than just coming up with the meanest scariest deterrent you can think of and having that hanging over people's heads.

evanpw 10y ago

Wells Fargo made about $2.5m from the fraudulent accounts, and Stumpf had $40m+ of compensation clawed back.

lazaroclapp 10y ago
Were those $40M used to pay back the victims of the fraudulent accounts, reimburse them for the stress, money and time spent fighting those charges and used to restore their creditworthiness, plus to fund the government and press groups involved in uncovering and fixing this mess? If so, I actually see it as a pretty reasonable outcome[1], specially given he is also not in charge there anymore. [1] well... modulo the fact that his compensation sounds surprisingly high to begin with, but that's between him and his stockholders.