Corporate Punishment: We Need Surgery Rather than Shotguns

          Keith implicitly raises a couple of important issues in his tirade against corporate crime: (1) First, how can we design fair and effective punishments to fit crimes deemed to have been committed by corporations, and (2) how can we do so without triggering rafts of unintended consequences? Underlying both of these questions is the more fundamental one of what exactly is a corporation? Despite the legalistic facade of "personhood", a corporation is in fact an association of persons collaborating around a collective purpose. Are a corporation's misdeeds, once proven,  then somehow the collective responsibility of all these people? Only those "at the top"? Only those directly party to the misdeeds? The difficulty in answering any of these questions with much precision explains why prosecution of corporate crime is often a slippery slope.

          One of the most sensational cases of corporate malfeasance in fairly recent memory would be the Enron saga, which climaxed with the firm's 2001 bankruptcy. More than 20,000 people lost their jobs, and  several of the firm's senior executives - including its president and its Chief Financial Officer - went to prison, where the president - Jeff Skilling - resides to this day. Creditors took huge loses and stockholders were wiped out. The company's 64-year old CEO Kenneth Lay was convicted of fraud and would have spent the remainder of his life behind bars were it not for the fact that he died of heart failure a couple of months after his trial. Enron's auditor, Arthur Anderson was deemed complicit in Enron's wrongdoing and stripped of the licenses necessary for it to continue in business. Another 28,000 people lost their jobs, and one of the world's largest and most highly respected accounting firms disappeared forever.

          It's hard to imagine a more unsparing set of punishments for corporate crime. Yet at the time, so intense was the anti-Enron and anti-corporate bloodlust that it seemed no punishment was going to be severe enough to satisfy people. Before Ken Lay's ultimate demise, California's Attorney General said at a press conference that he would like personally to escort him to a small prison cell that he would share with a "tattooed dude" who would "call him honey" and proceed to do to him what leering tattooed dudes in prison can be expected to do. And this from a liberal Democrat on record for his staunch opposition to hate crimes, environmental pollution, and all manner of bad things. Even more troubling, he was the state's highest legal officer charged with enforcing the laws of the land.

          The point is that otherwise rational people can become emotional and quite irrational on the subject of corporate crime. Large corporations often appear out of touch and out of reach and thus emerge as natural targets for popular resentment. This is true even among Republicans, who at times regard them as unholy extensions of Big Government. Reading news reports about possible corporate misdeeds, people often assume the worst and clamor for maximum punishments “for the guilty” before gaining a clear picture, or even any picture, of what has actually occurred.

          Which brings me back to Keith’s intemperate screed and the news of more current events. He complains about “malefactors walking free” and hiding behind “screens of deniability." Then he speculates boldly about how easy it should be to prove “beyond reasonable doubt” the culpability of corporations. While he doesn’t really explain himself, and while I’m surely not a lawyer, what he seems to be suggesting is a sweeping new field of application for the federal RICO law, or something like it, whereby ordinary corporations could be decreed criminal enterprises. Indeed, what a powerful weapon this would be in the hands of ambitious prosecutors! After gaining such judgments, they could bring all manner of retribution to bear on targeted corporations and the “malefactors” employed by them. Our heroic avengers could go about their good work unencumbered by pesky distractions like the burden of proof. Trial lawyers too could have a field day feeding on anything that remained alive afterwards.

          The only two companies that Keith mentions by name, because they are in the news currently, are Glaxo and Barclays. Both are, of course, British companies, although their operations are global as are the issues in question.  I don’t know much about the pharmaceutical industry and won’t comment on Glaxo, but I do pay some attention to the banks and fully understand the importance of the LIBOR index Barclays has now admitted to having of manipulated, along with the analogous EURIBOR in Europe.  Notional value of trillions of dollars of contracts are potentially affected, including interest-rate swaps, home mortgages, and numerous other types of instruments. Selective release of emails from traders apparently involved the affair casts an even more disturbing light over it, since the attitude of amoral and puerile aggression so common among traders is there for all to see. For those perhaps previously unaware of it,  our banking system entrusts massive amounts of investment money to people who emotionally never matured much past their early adolescence.

          But then again, what has really been going on here? For one thing, this is not a new issue. Four years ago, the Wall Street Journal - hardly a leftwing muckraking rag - raised serious questions about LIBOR and the subjective judgments that underlie its daily calculation. It was obviously a system seriously prone to abuse, although since the apparent manipulation at that time appeared systematically downward, the WSJ's investigation elicited a collective yawn from the markets and the Government.  After all, homeowners with adjustable rate mortgages were benefiting, and central banks  around the world at the time were laboring  to bring all rates down anyway. The already-deposed CEO of Barclays has even alleged that the Governor of the Bank of England encouraged him in the endeavor.

          This latest spate of news, however, is different. The Barclays traders appeared to have been collaborating with traders at other banks to advantage specific trading positions. Keeping this in perspective, we're talking about minute distortions to the index - probably no more than a basis point or two - but enough presumably to make a P&L difference for large and highly leveraged trades. While an effort will be made to dramatize this story with tales of destruction wrought on long-suffering homeowners and the like, nothing of the sort is likely to be possible. The victims will be institutional investors on the losing end of the manipulated trades.

          Having said that, this is nonetheless a very serious scandal that in some way strikes at the heart of what has become a grotesquely complicated and vulnerable financial system around the world. The case will not, and should not,  go away quickly.  There will be more investigations, law suits, sackings, and so forth, at Barclays and other banks,  followed undoubtedly by a major revamping to the archaic procedures for by which these indices are produced. And this should be all for the better. What there is not a place for, in my opinion, is a highly-charged moralistic crusade led by posturing politicians with no practical ideas of their own, backed by armies of self-dealing trial lawyers.

          I realize that I am exaggerating the position that Keith took in his brief letter, and I'm making unfair sport of it to some degree.  I'm actually in more sympathy than I probably sound with his underlying attitude, which is a deep frustration with the corruption, immaturity and breathtakingly short-term orientation that characterizes our current financial system, not to mention our political system. I do feel, however, that draconian and emotional responses to these problems, if allowed to take hold, will lead to explosive collateral damage and far worse problems in the future.