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Mike
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Must Read Economist article on the US Corprorate regulatory system as extortion
« on: 03 September 2014 »

Standard Chartered tried standing up to US regulatory bullying and got slaughtered (as have many more). [And just in case you are focusing on the cases where the croporates are wrong - its the shareholders who cough up - the management responsible for the error remain in situ (with their big fat bonuses)....]

The Economist - that most pukkha of free market leaning journals - tells it like it is.  Look at these figures - they are truly shocking.

http://www.economist.com/news/leaders/21614138-companies-must-be-punished-when-they-do-wrong-legal-system-has-become-extortion

Quote
The criminalisation of American business

Companies must be punished when they do wrong, but the legal system has become an extortion racket

WHO runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.


The amounts are mind-boggling. So far this year, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and other banks have coughed up close to $50 billion for supposedly misleading investors in mortgage-backed bonds. BNP Paribas is paying $9 billion over breaches of American sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays and others have settled for billions more, over various accusations. And that is just the financial institutions. Add BP’s $13 billion in settlements since the Deepwater Horizon oil spill, Toyota’s $1.2 billion settlement over alleged faults in some cars, and many more.

In many cases, the companies deserved some form of punishment: BNP Paribas disgustingly abetted genocide, American banks fleeced customers with toxic investments and BP despoiled the Gulf of Mexico. But justice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism (see article).

No soul, no body? No problem

Until just over a century ago, the idea that a company could be a criminal was alien to American law. The prevailing assumption was, as Edward Thurlow, an 18th-century Lord Chancellor of England, had put it, that corporations had neither bodies to be punished nor souls to be condemned, and thus were incapable of being “guilty”. But a case against a railway in 1909, for disobeying price controls, established the principle that companies were responsible for their employees’ actions, and America now has several hundred thousand rules that carry some form of criminal penalty. Meanwhile, ever since the 1960s, civil “class-action suits” have taught managers the wisdom of seeking rapid, discreet settlements to avoid long, expensive and embarrassing trials.

The drawbacks of America’s civil tort system are well known. What is new is the way that regulators and prosecutors are in effect conducting closed-door trials. For all the talk of public-spiritedness, the agencies that pocket the fines have become profit centres: Rhode Island’s bureaucrats have been on a spending spree courtesy of a $500m payout by Google, while New York’s governor and attorney-general have squabbled over a $613m settlement from JPMorgan. And their power far exceeds that of trial lawyers. Not only are regulators in effect judge and jury as well as plaintiff in the cases they bring; they can also use the threat of the criminal law.

Financial firms rarely survive being indicted on criminal charges. Few want to go the way of Drexel Burnham Lambert or E.F. Hutton. For their managers, the threat of personal criminal charges is career-ending ruin. Unsurprisingly, it is easier to empty their shareholders’ wallets. To anyone who asks, “Surely these big firms wouldn’t pay out if they knew they were innocent?”, the answer is: oddly enough, they might.

Perhaps the most destructive part of it all is the secrecy and opacity. The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs. Nor is it clear how the regulatory booty is being carved up. Andrew Cuomo, the governor of New York, who is up for re-election, reportedly intervened to increase the state coffers’ share of BNP’s settlement by $1 billion, threatening to wield his powers to withdraw the French bank’s licence to operate on Wall Street. Why a state government should get any share at all of a French firm’s fine for defying the federal government’s foreign policy is not clear.


I’ll see you in court—in another life

The best thing would be for at least some of these cases to go to proper trial: then a few of the facts would spill out. That is hardly in the interests of the regulators or their managerial prey, but shareholders at least should push for that. Two senators, Elizabeth Warren and Tom Coburn, have put forward a bill to make the terms of such settlements public, which would be a start. Prosecutors and regulators should also be required to publish the reasons why, given the gravity of their initial accusations, they did not take the matter all the way to court.

In the longer term, two changes are needed to the legal system. The first is a much clearer division between the civil and criminal law when it comes to companies. Most cases of corporate malfeasance are to do with money and belong in civil courts. If in the course of those cases it emerges that individual managers have broken the criminal law, they can be charged.

The second is a severe pruning of the legal system. When America was founded, there were only three specified federal crimes—treason, counterfeiting and piracy. Now there are too many to count. In the most recent estimate, in the early 1990s, a law professor reckoned there were perhaps 300,000 regulatory statutes carrying criminal penalties—a number that can only have grown since then. For financial firms especially, there are now so many laws, and they are so complex (witness the thousands of pages of new rules resulting from the Dodd-Frank reforms), that enforcing them is becoming discretionary.

This undermines the predictability and clarity that serve as the foundations for the rule of law, and risks the prospect of a selective—and potentially corrupt—system of justice in which everybody is guilty of something and punishment is determined by political deals . America can hardly tut-tut at the way China’s justice system applies the law to companies in such an arbitrary manner when at times it seems almost as bad itself.
« Last Edit: 03 September 2014 by Mike » Logged






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Re: Must Read Economist article on the US Corprorate regulatory system as extortion
« Reply #1 on: 03 September 2014 »

And more estimates of MASSIVE fines paid by shareholders to robber baron regulators for erros by unpunished management:

http://www.forbes.com/sites/robertlenzner/2014/08/29/too-big-to-fail-banks-have-paid-251-billion-in-fines-for-sins-committed-since-2008/

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Too Big To Fail Banks Have Paid $251 Billion in Fines For Sins Committed Since 2008

I was shocked to learn today that a group of the largest banks in the world, the very ones Uncle Sam spent big bucks on to save in 2008, have since then anted back to Uncle Sam a cool quarter of trillion  so far in the way of fines for engaging in some of the very behavior that required they be bailed out.

Thanks to the  estimable CCP Research Foundation, an independent research foundation in the UK, for doing this incredibly valuable spade-work for us, delineating in precise detail the malefactions of such wrongdoers as Bank of America BAC +1.12%, which has handed over roughly $120 billion of its rebounded operations, the price of the rotten mortgage-backed bonds sold to unsuspecting investors by Merrill Lynch and Countrywide Credit. These two troubled concerns required a financial savior from their impending insolvency. Herewith a useful learning experience.

So, Uncle Sam acted first as their marriage broker and later on responded to the roar of anger against Wall Street, by taking back a chunk of the money Bank of America had been allowed to coin. By the way, you should know that this roughly $120 billion was most likely paid with pre-tax dollars, a beneficial way to pay these debts. Mind you, the amount is not chicken feed, as it is more than 67% of the Bank of America’s stock market capitalization, as we speak.

By the way, the ante from BAC to Uncle Sam continues to grow. Just last week, the bank agreed to turn over an additional $16.9 billion  as pay back for those dangerously destructive mortgages. And I have to stress that I think this revenge modus operandi is a dangerous precedent. Because what if Bank of America gets into trouble again, partly since its financial fire power has been substantially reduced by events in 2008. It’s a poor substitute for putting top execs from Merrill Lynch and Countrywide Credit in jail. They must be laughing all the way to the bank.

Then there’s giant J.P. Morgan Chase , which has paid over some $70 billion since 2008 for a whole series of questionable behavior including the fudging of the London Whale’s misbegotten derivative trades; for this errant behavior, which cost the bank $6.5 billion in losses, it had to fork over just under $1 billion.  Still, a very embarrassing, quite shocking misbehavior by such powerful giant global banks that you have to question management’s ability to be on top of all aspects. This $70 billion, by the  way, is roughly one third of JP Morgan’s current market capitalization of $220 billion.

As for  poor Citigroup C +0.6%, it will add another $7 billion to the $31 billion it has already paid in fines for all the mischief it did back before and during the great financial crisis cum meltdown. That means so far $38 billion or almost 25% of its market capitalization has gone into paybacks. UBS, the Swiss giant, has paid fines of about $25 billion for a whole series of sins including the hiding of US investors from Uncle Sam and the laundering of money for Iran, which was against our laws.

The irony will come when and if the Fed and the Treasury have to bail out some of these banking institutions as the result of  the next financial crisis, whenever that happens to be. Then, we will have gone from saving them to letting them consolidate to fining them big-time before having to consider  quite costly campaigns to save them again. That will be called regulatory revenge gone awry.

In the meantime you will notice that Bank of America is one of the most active stocks on the Big Board,  rising 4 times in price from a 2009 low of $3.87 to around $16 a share. You could have bought it at $5.00 a share at the close of 2011, when it’s fines were a negative market  influence. JP Morgan Chase sold at $22.31 in early March 2009, the market bottom; today it is nearing $60 a share, which is very nearly a triple in  5 1/2 years. Citigroup has basically quintupled from  a low of $10 to $50, after a reverse 1 share for 10 shares split deep into the crisis.

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Re: Must Read Economist article on the US Corprorate regulatory system as extortion
« Reply #2 on: 05 September 2014 »

Synchronicitously the next day this one came out [NB BP has already paid all the COSTS of the whole thing].

Not sure who keeps this money - but in banking case the banking regulator does!!!  The theiving state phenomenon (whether speed cameras, parking fines etc etc or these extremes) is alive and kicking.  And who pays?  Us of course (and if you think you dont your pension fund is...).

Not just the US of course (although they are taking it to new heights) - after all Bernie Ecclestone got off his German fraud case by paying the state $100m  rolleyes

http://www.nytimes.com/2014/09/05/business/bp-negligent-in-2010-oil-spill-us-judge-rules.html

Quote
BP May Be Fined Up to $18 Billion for Spill in Gulf

NEW ORLEANS — In the four years since the blowout on the Deepwater Horizon oil rig killed 11 workers and sent millions of barrels of oil gushing into the Gulf of Mexico, BP has spent more than $28 billion on damage claims and cleanup costs, pleaded guilty to criminal charges and emerged a shrunken giant.

But through it all, the company has maintained that it was not chiefly responsible for the accident, and that its contractors in the operation, Halliburton and Transocean, should shoulder as much, if not more, of the blame.

On Thursday, a federal judge here for the first time bluntly rejected those arguments, finding that BP was indeed the primary culprit and that only it had acted with “conscious disregard of known risks.” He added that BP’s “conduct was reckless.”

By finding that BP was, in legal parlance, grossly negligent in the disaster, and not merely negligent, United States District Court Judge Carl J. Barbier opened the possibility of $18 billion in new civil penalties for BP, nearly quadruple the maximum Clean Water Act penalty for simple negligence and far more than the $3.5 billion the company has set aside.

...

BP has already pleaded guilty to manslaughter and other charges and agreed to pay $4 billion in federal criminal penalties. But the company’s ultimate civil liability is far from determined.

...

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