5 ms·

This is basically a perfect example of how "capitalism" in the US is not capitalism anymore. No corporation should be insulated from the financial downside of i

This is basically a perfect example of how "capitalism" in the US is not capitalism anymore. No corporation should be insulated from the financial downside of its incompetence. In the real world, Chase should have gone under or at least lost a hundred billion in market cap, but instead they are in cahoots with government regulators to limit their downside and protect their upside from what is their fault. This is not capitalism! And it's painful to see how this hybrid growth-corporatist model trump true innovation and economic progress. It's an insult to free market economics and democracy at the same time. Rant over. One addendum: jail time isn't the answer. Putting an executive in a minimum security prison for 5 years just lets another one take his place. CEOs aren't afraid of jail time, they're afraid of losing money. If you let banks fail who deserve it then creative destruction will ensure stronger, better and safer banks in the future. Capitalism can't survive without profit and loss working hand in hand.

Sherlock 12y ago
When banks go down they take down the economy with them; that's what 'too big to fail' means. It's not worth all the human suffering caused by a depression instead of a recession just to prove that the banks should be more cautious.
- nulltype 12y ago
  Then don't allow large banks.
  - josefresco 12y ago
    Cat's already out of that bag on that one. The issue now is regulation and passing laws to control and reign in power on those large banks. Unfortunately the public doesn't get excited about passing complicated financial regulations.
    - Andrew_Quentin 12y ago
      And if you can't punish them for breaching those regulations what worth are they?
      - dmckeon 12y ago
        Among the choices of: a) minimize a current financial crisis b) avoid future financial crises c) penalize the law breakers responsible The feds have done fairly well on a), avoiding a complete collapse of depositor confidence, but the politicians and rabble-rousers seem to be focused on c), arguing about exposure and punishment instead of figuring out how to prevent another collapse. Structuring a system that is more resistant to fraud and other behaviour that puts the national economy at risk would help. Either effective oversight or more exposure to market forces might help. Merely punishing individual or corporate wrong-doers will not prevent another collapse. A firm, banking, investment, or trading, that is considered "too big to fail" is also not sufficiently exposed to market forces for the market in its shares to reflect the actual risks to the firm. In other words, the taxpayers are covering a TBTF bank's risks. We would benefit far more from finding a way to move banking away from consolidation than we would from jailing or fining the guilty. The country should be able to suffer the complete failure of any single bank or firm without much more than a small hiccup in our economy. FDIC rates should reflect risk for depositors per-institution, and be public, the way bond ratings are. Stock-holders and bank creditors would be on their own. A nation whose banking industry is dominated by 10 banks cannot be secure, with around 100 banks of size is at risk, and with 1,000 banks may be able to cope with a few percent of them failing every year. Finding a market solution to counterbalance the ongoing wave of consolidation would help.
    - msandford 12y ago
      Break them up then. Not directly, but indirectly by changing the incentives to be big. Also define a "bank" semi-recursively so even a company which merely owns 20 banks (or a company which owns a company which owns a bank, etc) is still considered a bank for the purposes of these laws. Banks with holdings of over 0.5% of GDP lose all FDIC protection, while still paying. Banks with holdings over 1% pay quadruple FDIC premiums while still receiving no coverage. Banks over 2% also pay double-tax on every tax they pay either directly or indirectly, so all the payroll taxes are doubled and so are corporate profit taxes. Banks over 3% pay all above but instead of double taxes, quadruple taxes. Banks over 5% pay everything and get taxed at 5% of assets per year. Very smart folks would immediately start figuring out how to fairly cleanly break the banks up while simultaneously not destroying themselves or the entire economy. Why? Because there'd BE MONEY IN IT.
    - bmmayer1 12y ago
      The regulations are what created large banks in the first place. It's virtually impossible to start a bank today because of the web of regulations; thus new banks don't get started and the big banks don't get competition.
    - zzalpha 12y ago
      "Cat's already out of that bag on that one." I'm sure you would've said the same about Standard Oil or Bell back in the day. Breaking up large corporation can and has been done before. It could be done again if government was interested in doing it, but unfortunately a combination of captured regulators and a revolving door between government and business more or less ensures that won't happen.
- justicezyx 12y ago
  That means it is no longer capitalism, right?
- gregorias 12y ago
  This is a false dichotomy and sugarcoating. The article is not just about banks being reckless, but about criminal fraud committed wilfully and with intent by Chase's high ranking personnel. And they not only got away with it, but also profited from the aftermath. So the real situation here is the opposite. People with money and power get even more while everyone dependent on them suffers from their actions. It's outrageous and what should happen is criminal persecution of responsible individuals, not fines for corporation which don't touch people in charge and as you say "take down the economy".
- GVIrish 12y ago
  > It's not worth all the human suffering caused by a depression instead of a recession just to prove that the banks should be more cautious. It's not about proving a point, it's about preventing this situation from happening again. If the financial industry knows that outright financial fraud on a massive scale will never be punished, it ensures that outright financial fraud will continue unabated in the future. Millions of people will be hurt again because we didn't want the pain of dealing with the problem now. HSBC got caught laundering money for drug cartels and escaped with a fine. If we're just going to let corporate malfeasance go unpunished, why even have the laws on the books at all?
  - Lawtonfogle 12y ago
    "If we're just going to let corporate malfeasance go unpunished, why even have the laws on the books at all?" Because the point of laws is not to punish the elite. They may be written to appear fair to the common reader, but they are intended and designed to not apply to the elite.
- georgemcbay 12y ago
  That's why you bail out the banks, realize "Oh shit, this whole deregulation thing was a bad idea because left unchecked people are prone to selfish greed at a scale which threatens the world economy" and then start to regulate them again, slowly breaking them up into businesses that aren't too big to fail lest you run into the same issue in the future. Instead we bailed them out, did basically nothing regarding new regulations and the banks are still growing and complaining about too much government regulation and some of them who gladly took bailout money even have the nerve to complain about the 'moral hazard' of government mandated mortgage refinancing.
josefresco 12y ago
It's not as easy as "letting Chase bleed" to send a message. If during 2008-9 the US charged these executives with the crimes they arguable should have been charge with, it would have led to massive panic in the financial world. So the US "pretended" that these guys were just caught by surprise because admitting the alternative had conceivably much worse consequences. Maintaining confidence in the markets was priority #1 for the team dealing with the financial collapse of 2008.
- encoded 12y ago
  > Maintaining confidence in the markets was priority #1 for the team dealing with the financial collapse of 2008. Arguably an act of fraud in and of itself.
- javajosh 12y ago
  >It's not as easy as "letting Chase bleed" to send a message. If during 2008-9 the US charged these executives with the crimes they arguable should have been charge with, it would have led to massive panic in the financial world. This is the common refrain, but is it true? I don't see why holding bank leadership accountable for crimes that harm their clients is a bad thing. In fact, I'm sort of surprised that the financial world isn't more "upset" over the fact that US banks have been given carte blanche to knowingly defraud their customers. Why do people still invest with Chase?
  - josefresco 12y ago
    Frontline did a great 4 part series on this whole debacle. Transcript: http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/money-power-wall-street/transcript-19/ http://www.pbs.org/wgbh/pages/frontline/business-economy-fin... There's obviously a lot more to this than this one quote, but this sums it up well (from part 2) "JOSHUA GREEN, Bloomberg Businessweek: Geithner’s entire recovery plan depended on confidence. And if you suddenly started going in and giving haircuts, people are going to get upset. They’re going to be worried. Investors are going to pull back right at the time when they needed investors to have enough confidence in these banks to put their money back in."
AnimalMuppet 12y ago
I disagree. CEO's aren't afraid of losing the corporation's money or the stockholders' money or the government's money or the public's money. But I bet that they are afraid of losing the CEO's money, and I bet they're afraid of the CEO in jail.
- opendais 12y ago
  I think from a rational, economic perspective if you make $100 million but spend 5 years in jail [and losing, say, $50 million in legal fees and fines], most people would consider that coming out ahead.
  - thesteamboat 12y ago
    Sure if you take someone off the street and give this offer to them. But people who rise to the position of being able to consider [be CEO who does unscrupulous things] have other options that are almost as good. We just need to shift their calculations so that they're falling behind whatever their next best alternative is.
    - opendais 12y ago
      Then explain HSBC and Jamie Dimon+Chase to me? $9 billion just to shut things up and keep them from going to trial? What other motive would he have had to enable this [since he said he was aware of it in 2006] besides greed and the expectation that he'd profit from it?
      - waps 12y ago
        Like many people higher up, he'd made large bets and instead of admitting he'd screwed up, he tries to keep the lie going. This is extremely common behaviour, high up and on the street, and it rarely benefits the person doing it - except in the extreme short term. There is something people don't realize about decision making : time horizons. You make decisions that benefit you in time. That means you consider whether an action benefits you at point X in the future. There are extreme examples, like giving a kid all the candy he'll get for a week and letting him divide it up. On the other end of the spectrum we have the Sagrada Familia. The people voting to have it built would never see any part of it. Their grandchildren wouldn't see more than a tiny bit. Their grandchildren's grandchildren would not see it. And so on. Now these aren't "pure" examples. The kid is not going to eat all the candy right then and there, and building the Sagrada Familia had economic advantages when it was being built, and even today. But if you consider most crimes at a time horizon of a day or two. They make sense, suddenly they become rational actions. HSBC and Jamie Dimon made decisions that would benefit them for years at least, and then lead to disaster. This is in fact quite a long time horizon. These are rational actions. Given the outcome, they are very rational actions.
pjungwir 12y ago
> CEOs aren't afraid of jail time Let's test that hypothesis. :-) I suspect if they really didn't mind that much we would see it more often. edit: s/more often/at least once/
hiou 12y ago
Why are you assuming capitalism and free markets are mutually inclusive? Not to get into a discussion of semantics, but US Capitalism is very dependent on the free flow of capital via investments and loans. The government sets all of that up and corporations essentially just handle the operations for it. There's definitely some free market aspects, for example there are usually a couple corporations competing to obtain as much of the market share for that responsibility, but there never has been, at least in the last 100 or so years anything like full on laissez faire free market economics in the US. The companies are not a whole lot more than government utilities with a little bit of free market competition and flexibility mixed in on top.
- bmmayer1 12y ago
  I'm not saying they're mutually exclusive. I'm saying we're not a capitalist country or a free market country. US "capitalism" is not dependent on the free flow of capital--it's arguably very unfree flow of capital when it seeks out legislatively assigned winners at the expense of taxpayers or worse, corruptively assigned winners at the expense of honest participants in the market. In other words, Adam Smith would be disgusted with our current society. I wrote a blog post about this: http://brianmayer.com/2012/07/what-adam-smith-really-said-about-government/ http://brianmayer.com/2012/07/what-adam-smith-really-said-ab...
FD3SA 12y ago
The Attorney General of the U.S., Eric Holder, is now acting as an economic advisor by factoring economic consequences into the justice process [1]. This means that, if a crime is committed and evidence exists to prosecute, the Attorney General may stay proceedings to protect the economy. This is an incredible and fascinating development in the American Capitalist Democracy. As far as I understand, there is no precedent for such logic in any democratic legal system. A corporation that is so vital to the nation that it is immune from legal consequence cannot exist in a capitalist democracy. Not to put too fine a point on it, but this new system is very reminiscent of the mean human society throughout history: oligarchy. https://www.youtube.com/watch?v=Z3zwhp5-jXA https://www.youtube.com/watch?v=Z3zwhp5-jXA
- waps 12y ago
  This is not new and has in fact always been the case, in fact it's part of his job description. Yes the justice system can in theory bring down the state. Needless to say, it is quite aware that it should avoid doing that. The application to huge banks is new, but that's it.
ArkyBeagle 12y ago
The Scots Free banks worked like you say. When they failed, they failed and were liquidated ( as per Laurence H. White). They were forcibly folded into the the Bank of England by the Peel Act of 1845. There is a medium-length Murray Rothbard diatribe against Laurence H. White; it appears to me to be principally about inflation and whether or not the Scots banks actually had access to any specie. I can never say I am sure what Mr. Rothbard is on about. The very public justification given for bailouts is that there was systemic risk. Calomiris/Haber wrote "Fragile By Design" in which the U.S. and Canada are compared/contrasted ( as close to a natural experiment as you can get ) and they essentially find rather deep cultural reasons for this. The "why" of the mortgage crisis is something they seem to have in better focus than most; it has to do with how public welfare functions are perceived in Canada and the U.S. The amount we seem to not know about this issue is staggering.

Sherlock 12y ago

When banks go down they take down the economy with them; that's what 'too big to fail' means. It's not worth all the human suffering caused by a depression instead of a recession just to prove that the banks should be more cautious.

nulltype 12y ago
Then don't allow large banks.
- josefresco 12y ago
  Cat's already out of that bag on that one. The issue now is regulation and passing laws to control and reign in power on those large banks. Unfortunately the public doesn't get excited about passing complicated financial regulations.
  - Andrew_Quentin 12y ago
    And if you can't punish them for breaching those regulations what worth are they?
    - dmckeon 12y ago
      Among the choices of: a) minimize a current financial crisis b) avoid future financial crises c) penalize the law breakers responsible The feds have done fairly well on a), avoiding a complete collapse of depositor confidence, but the politicians and rabble-rousers seem to be focused on c), arguing about exposure and punishment instead of figuring out how to prevent another collapse. Structuring a system that is more resistant to fraud and other behaviour that puts the national economy at risk would help. Either effective oversight or more exposure to market forces might help. Merely punishing individual or corporate wrong-doers will not prevent another collapse. A firm, banking, investment, or trading, that is considered "too big to fail" is also not sufficiently exposed to market forces for the market in its shares to reflect the actual risks to the firm. In other words, the taxpayers are covering a TBTF bank's risks. We would benefit far more from finding a way to move banking away from consolidation than we would from jailing or fining the guilty. The country should be able to suffer the complete failure of any single bank or firm without much more than a small hiccup in our economy. FDIC rates should reflect risk for depositors per-institution, and be public, the way bond ratings are. Stock-holders and bank creditors would be on their own. A nation whose banking industry is dominated by 10 banks cannot be secure, with around 100 banks of size is at risk, and with 1,000 banks may be able to cope with a few percent of them failing every year. Finding a market solution to counterbalance the ongoing wave of consolidation would help.
  - msandford 12y ago
    Break them up then. Not directly, but indirectly by changing the incentives to be big. Also define a "bank" semi-recursively so even a company which merely owns 20 banks (or a company which owns a company which owns a bank, etc) is still considered a bank for the purposes of these laws. Banks with holdings of over 0.5% of GDP lose all FDIC protection, while still paying. Banks with holdings over 1% pay quadruple FDIC premiums while still receiving no coverage. Banks over 2% also pay double-tax on every tax they pay either directly or indirectly, so all the payroll taxes are doubled and so are corporate profit taxes. Banks over 3% pay all above but instead of double taxes, quadruple taxes. Banks over 5% pay everything and get taxed at 5% of assets per year. Very smart folks would immediately start figuring out how to fairly cleanly break the banks up while simultaneously not destroying themselves or the entire economy. Why? Because there'd BE MONEY IN IT.
  - bmmayer1 12y ago
    The regulations are what created large banks in the first place. It's virtually impossible to start a bank today because of the web of regulations; thus new banks don't get started and the big banks don't get competition.
  - zzalpha 12y ago
    "Cat's already out of that bag on that one." I'm sure you would've said the same about Standard Oil or Bell back in the day. Breaking up large corporation can and has been done before. It could be done again if government was interested in doing it, but unfortunately a combination of captured regulators and a revolving door between government and business more or less ensures that won't happen.
justicezyx 12y ago
That means it is no longer capitalism, right?
gregorias 12y ago
This is a false dichotomy and sugarcoating. The article is not just about banks being reckless, but about criminal fraud committed wilfully and with intent by Chase's high ranking personnel. And they not only got away with it, but also profited from the aftermath. So the real situation here is the opposite. People with money and power get even more while everyone dependent on them suffers from their actions. It's outrageous and what should happen is criminal persecution of responsible individuals, not fines for corporation which don't touch people in charge and as you say "take down the economy".
GVIrish 12y ago
> It's not worth all the human suffering caused by a depression instead of a recession just to prove that the banks should be more cautious. It's not about proving a point, it's about preventing this situation from happening again. If the financial industry knows that outright financial fraud on a massive scale will never be punished, it ensures that outright financial fraud will continue unabated in the future. Millions of people will be hurt again because we didn't want the pain of dealing with the problem now. HSBC got caught laundering money for drug cartels and escaped with a fine. If we're just going to let corporate malfeasance go unpunished, why even have the laws on the books at all?
- Lawtonfogle 12y ago
  "If we're just going to let corporate malfeasance go unpunished, why even have the laws on the books at all?" Because the point of laws is not to punish the elite. They may be written to appear fair to the common reader, but they are intended and designed to not apply to the elite.
georgemcbay 12y ago
That's why you bail out the banks, realize "Oh shit, this whole deregulation thing was a bad idea because left unchecked people are prone to selfish greed at a scale which threatens the world economy" and then start to regulate them again, slowly breaking them up into businesses that aren't too big to fail lest you run into the same issue in the future. Instead we bailed them out, did basically nothing regarding new regulations and the banks are still growing and complaining about too much government regulation and some of them who gladly took bailout money even have the nerve to complain about the 'moral hazard' of government mandated mortgage refinancing.

josefresco 12y ago

It's not as easy as "letting Chase bleed" to send a message. If during 2008-9 the US charged these executives with the crimes they arguable should have been charge with, it would have led to massive panic in the financial world. So the US "pretended" that these guys were just caught by surprise because admitting the alternative had conceivably much worse consequences. Maintaining confidence in the markets was priority #1 for the team dealing with the financial collapse of 2008.

encoded 12y ago
> Maintaining confidence in the markets was priority #1 for the team dealing with the financial collapse of 2008. Arguably an act of fraud in and of itself.
javajosh 12y ago
>It's not as easy as "letting Chase bleed" to send a message. If during 2008-9 the US charged these executives with the crimes they arguable should have been charge with, it would have led to massive panic in the financial world. This is the common refrain, but is it true? I don't see why holding bank leadership accountable for crimes that harm their clients is a bad thing. In fact, I'm sort of surprised that the financial world isn't more "upset" over the fact that US banks have been given carte blanche to knowingly defraud their customers. Why do people still invest with Chase?
- josefresco 12y ago
  Frontline did a great 4 part series on this whole debacle. Transcript: http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/money-power-wall-street/transcript-19/ http://www.pbs.org/wgbh/pages/frontline/business-economy-fin... There's obviously a lot more to this than this one quote, but this sums it up well (from part 2) "JOSHUA GREEN, Bloomberg Businessweek: Geithner’s entire recovery plan depended on confidence. And if you suddenly started going in and giving haircuts, people are going to get upset. They’re going to be worried. Investors are going to pull back right at the time when they needed investors to have enough confidence in these banks to put their money back in."

AnimalMuppet 12y ago

I disagree. CEO's aren't afraid of losing the corporation's money or the stockholders' money or the government's money or the public's money. But I bet that they are afraid of losing the CEO's money, and I bet they're afraid of the CEO in jail.

opendais 12y ago
I think from a rational, economic perspective if you make $100 million but spend 5 years in jail [and losing, say, $50 million in legal fees and fines], most people would consider that coming out ahead.
- thesteamboat 12y ago
  Sure if you take someone off the street and give this offer to them. But people who rise to the position of being able to consider [be CEO who does unscrupulous things] have other options that are almost as good. We just need to shift their calculations so that they're falling behind whatever their next best alternative is.
  - opendais 12y ago
    Then explain HSBC and Jamie Dimon+Chase to me? $9 billion just to shut things up and keep them from going to trial? What other motive would he have had to enable this [since he said he was aware of it in 2006] besides greed and the expectation that he'd profit from it?
    - waps 12y ago
      Like many people higher up, he'd made large bets and instead of admitting he'd screwed up, he tries to keep the lie going. This is extremely common behaviour, high up and on the street, and it rarely benefits the person doing it - except in the extreme short term. There is something people don't realize about decision making : time horizons. You make decisions that benefit you in time. That means you consider whether an action benefits you at point X in the future. There are extreme examples, like giving a kid all the candy he'll get for a week and letting him divide it up. On the other end of the spectrum we have the Sagrada Familia. The people voting to have it built would never see any part of it. Their grandchildren wouldn't see more than a tiny bit. Their grandchildren's grandchildren would not see it. And so on. Now these aren't "pure" examples. The kid is not going to eat all the candy right then and there, and building the Sagrada Familia had economic advantages when it was being built, and even today. But if you consider most crimes at a time horizon of a day or two. They make sense, suddenly they become rational actions. HSBC and Jamie Dimon made decisions that would benefit them for years at least, and then lead to disaster. This is in fact quite a long time horizon. These are rational actions. Given the outcome, they are very rational actions.

pjungwir 12y ago

> CEOs aren't afraid of jail time Let's test that hypothesis. :-) I suspect if they really didn't mind that much we would see it more often. edit: s/more often/at least once/

hiou 12y ago

Why are you assuming capitalism and free markets are mutually inclusive? Not to get into a discussion of semantics, but US Capitalism is very dependent on the free flow of capital via investments and loans. The government sets all of that up and corporations essentially just handle the operations for it. There's definitely some free market aspects, for example there are usually a couple corporations competing to obtain as much of the market share for that responsibility, but there never has been, at least in the last 100 or so years anything like full on laissez faire free market economics in the US. The companies are not a whole lot more than government utilities with a little bit of free market competition and flexibility mixed in on top.

bmmayer1 12y ago
I'm not saying they're mutually exclusive. I'm saying we're not a capitalist country or a free market country. US "capitalism" is not dependent on the free flow of capital--it's arguably very unfree flow of capital when it seeks out legislatively assigned winners at the expense of taxpayers or worse, corruptively assigned winners at the expense of honest participants in the market. In other words, Adam Smith would be disgusted with our current society. I wrote a blog post about this: http://brianmayer.com/2012/07/what-adam-smith-really-said-about-government/ http://brianmayer.com/2012/07/what-adam-smith-really-said-ab...

FD3SA 12y ago

The Attorney General of the U.S., Eric Holder, is now acting as an economic advisor by factoring economic consequences into the justice process [1]. This means that, if a crime is committed and evidence exists to prosecute, the Attorney General may stay proceedings to protect the economy. This is an incredible and fascinating development in the American Capitalist Democracy. As far as I understand, there is no precedent for such logic in any democratic legal system. A corporation that is so vital to the nation that it is immune from legal consequence cannot exist in a capitalist democracy. Not to put too fine a point on it, but this new system is very reminiscent of the mean human society throughout history: oligarchy. https://www.youtube.com/watch?v=Z3zwhp5-jXA https://www.youtube.com/watch?v=Z3zwhp5-jXA

waps 12y ago
This is not new and has in fact always been the case, in fact it's part of his job description. Yes the justice system can in theory bring down the state. Needless to say, it is quite aware that it should avoid doing that. The application to huge banks is new, but that's it.

ArkyBeagle 12y ago

The Scots Free banks worked like you say. When they failed, they failed and were liquidated ( as per Laurence H. White). They were forcibly folded into the the Bank of England by the Peel Act of 1845. There is a medium-length Murray Rothbard diatribe against Laurence H. White; it appears to me to be principally about inflation and whether or not the Scots banks actually had access to any specie. I can never say I am sure what Mr. Rothbard is on about. The very public justification given for bailouts is that there was systemic risk. Calomiris/Haber wrote "Fragile By Design" in which the U.S. and Canada are compared/contrasted ( as close to a natural experiment as you can get ) and they essentially find rather deep cultural reasons for this. The "why" of the mortgage crisis is something they seem to have in better focus than most; it has to do with how public welfare functions are perceived in Canada and the U.S. The amount we seem to not know about this issue is staggering.