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Thursday, February 02, 2012

Busting or reforming Wall Street?

Ever have that problem where you are finishing up an article, putting the final changes in the text, emailing it to your editors and then you see yet another new source that arguably buttresses some of your (hopefully already) well-supported arguments?

That's how I feel today.  The WSJ Blog is reporting that tomorrow, Time magazine's front cover story will feature a picture of Preet Bharara, the United States Attorney for Southern District of New York, and that the title of the story is "Busting Wall Street."  The story appears to be about how the SDNY is aggressively prosecuting fraud and insider trading on Wall Street, including fraud related to the sale of mortgage backed securities.  The publication nicely coincides with two guilty pleas by cooperating defendants in the investigation and prosecution of various traders at Credit Suisse, who allegedly inflated the value of mortgage-backed bonds in 2007 and 2008, when the housing market was beginning to deteriorate.    

The reason I said, "dang!" when I saw Preet's face on the cover of Time (other than the odd fact that he and I served as young AUSA's during roughly the same time period) was that the magazine cover served as yet another reminder that our society tends to prefer punishment to regulation.  When push comes to shove, we like "getting" the bad guys more than we like sitting down and figuring out how to improve regulatory systems.  And related to that, I think as a general rule, we find it easier to look at the complex phenomena that led to the financial crisis and conclude "fraud" or "bad guys did this," than to admit that lots of different failures (regulatory, market and otherwise) fed into the whole mess.  (Indeed, the Credit Suisse allegations seem to pertain to conduct that happened after the crisis was already beginning, when the real estate market began to erode).

Punishment narratives are attractive because they are simple: Bad guy was greedy; bad guy stole money from others; bad guy will now get his just deserts.  The context and mechanics may be complicated (like explaining to a jury how bonds are priced), but the underlying narrative is remarkably easy to grasp and support.

The good side of all this simplicity is that it enables government actors (prosecutors, investigators, agency heads and politicians) to gather public and political support, which in turn ought to translate into additional resources (like legal tools, money and a broader and deeper talent pool).  The additional enforcement, in turn, arguably plays a role in deterring fraudulent behavior.  (For a review of the ways in which deterrence can backfire in the corporate context, see my piece on corporate fraud here).  But there are some pretty important drawbacks that we should think about too (some of which Donald Langevoort so expertly discusses here): simplistic narratives may cause us to focus too intently on finding and punishing disloyal, deceitful actors, without regard for those decision-makers who cause massive drops in wealth through stubborness or stupidity. (E.g., Citigroup's Chuck Prince, and AIG's, Joseph Cassano).  

And there's the rub: we like punishment because it makes us feel better about the present and future, but we might be shortchanging ourselves if we believe the simplistic narratives that punishers often employ.  I'll talk more about this later in the month when I post on SSRN my new paper, Choosing Punishment, which is forthcoming in the Boston University Law Review in March.  

Posted by Miriam Baer on February 2, 2012 at 05:53 PM | Permalink


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This coincides nicely with the Daily Show episode from Tuesday, when Stewart talked with Prof. Jonathan Macey about abuses in the private equity business, among other things. There was a moment thwne Stewart brought up some seemingly bad actions by Bain (seemingly making money off driving a company into bankruptcy), and Macey's response was basically "if someone could prove they did that purposefully, they could be sued." It was a perfect encapsulation of the punishment-vs-regulation fight you're talking about, and also a good illustration of the fact that punishment is never enough (when we even catch the bad guys), especially when it comes to these high-value white collar crimes (a cashier who embezzels money from McDonalds is probably likely to spend more time in prison than a Wall Street businessman who embezzles from pension funds.)

The fact that something bad is "illegal" ought not satisfy us, but it does.

Posted by: Andrew MacKie-Mason | Feb 2, 2012 7:37:46 PM

we find it easier to look at the complex phenomena that led to the financial crisis and conclude "fraud" or "bad guys did this," than to admit that lots of different failures (regulatory, market and otherwise) fed into the whole mess.

Why not both? Is there some reason why we have to either regular or punish, assuming there really were bad actions involved? (It's not use for people who committed fraud to say, "well, it was a complicated time, when all sorts of market and regulatory failures where happening, and after all, everyone was filing false claims about the value of their mortgage backed securities, which had already lost money anyway for reasons that were not our fault, so really, it's unfair to punish me.")

Posted by: Matt | Feb 2, 2012 7:18:22 PM

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