Posts Tagged ‘Corporate crime’

How much equality do we want?

January 9, 2017

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Grant that extreme economic inequality is a bad thing.  Grant that ever-increasing economic inequality is a bad thing.

Grant that complete equality of incomes is not feasible and maybe not desirable.  How much equality is enough?

The economist Friedrich Hayek wrote in The Road to Serfdom (as I recall) that it is impossible that people could reach a consensus on what each and every person deserves.   Once you reject complete equality, he  wrote, the only acceptable distribution of income is what results from the impersonal working of the free market.

A democratic government could never determine a distribution of income that is satisfactory to everyone, or even a majority, Hayek thought; if it tries, the result can only be gridlock and a breakdown of democracy.

But there are ways to reduce inequality that neither set limits on any individual’s aspirations nor give some group of bureaucrats the power to decide who gets what.   Some that come to mind immediately are:

  1. Prosecute those who get rich by lawbreaking.
  2. Set limits on unearned income.
  3. Break up monopolies.
  4. Empower labor unions and cooperatives.
  5. Provide good public services to all, regardless of income.
  6. Provide decent jobs for all who are willing and able to work.

What are your ideas?

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The limited criminal liability corporation

September 21, 2015

The modern corporation is a structure that allows investors to maximize profit while limiting their individual losses.  The Volkswagen emissions scandal shows that it also is a structure that enables lawbreakers to limit their individual accountability for their crimes.

Because the corporation is treated by law as a person separate from its owners, the individual investors can’t lose anything more than what they put in.  Any debts over and above that are swallowed by the creditor or absorbed by somebody else.

vwWhen executives of a corporation break the law, it usually is the corporation, most of whose employees and owners may be completely innocent, that is penalized and not the individuals actually responsible.

Volkswagen since 2009 installed software in 482,000 diesel vehicles to turn on emissions control systems when approaching an inspection station, but leave them off the rest of the time, which improved fuel economy and engine performance.

Dirty-burning fuel sickened many people and made already-sick people worse.  By one estimate, it caused the deaths of from 5 to 26 people in southern California alone.

Installing such software is no easy task.  Corporate executives would have had to sign off on it.

News stories say that Volkswagen could be liable for up to $37,500 per vehicle, which would mean a penalty of $18 billion.  That would be a big fine.  Last year Volkswagen reported a net profit of $12 billion on $226 billion in revenue.  I would be surprised if VW wound up paying this amount.

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“I’ll be gone, you’ll be gone”

March 15, 2011

A Wall Street money manager named Barry Ritholtz wrote a good article in the Washington Post about the IBGYBG management philosophy of so many Wall Street banking and brokerage firms.

IBGYBG is shorthand for “Let’s grab everything we can get now because I’ll be gone and you’ll be gone when everything crashes.”

I do not care what shareholders and their boards pay the people who create enormous value. … … On the other hand, many others received huge bonuses for bankrupting their firms and driving the economy into recession. Their job performance should be the subject of your ire and of regulators. They brought the world to the abyss of economic collapse because they had incentives to do so.

If that sounds unbelievable, consider:

– Subprime mortgage brokers who were paid based on the quantity – not the quality – of their mortgage writing. The loans lenders sold to Wall Street to be securitized carried a 90-day warranty. Hence, the brokers’ jobs were to find people who would make the first three monthly payments of a 30-year loan. After that, it was no longer their concern.

– Derivative traders who knew that what they were buying was going to blow up. In 2007, I published an e-mail from one such trader who wrote, “We knew we were buying time bombs.” The motivation was deal fees and bonuses. Once the derivative machinery was in motion, they had to “keep buying collateral, in order to keep issuing these transactions.”

– Collateralized debt obligation managers whose job it was to assemble pools of mortgages, yet had little or no understanding of the underlying loans. The salespeople, traders and managers working in the mortgage sector had incentives that were upside down. The greater the risk they took, the more they were paid. But brunt of those risks was on third parties, never themselves. It was shareholders and taxpayers who shouldered them.

This is backward. The people who should bear the downside are the ones who have the upside. Instead, the system was perversely one of private profit but public risk.

He named names:

l Lehman Brothers Chairman and CEO Richard Fuld Jr. made nearly a half-billion – $490 million – from selling Lehman stock in the years before it filed for Chapter 11 bankruptcy.

l Countrywide Financial (now owned by Bank of America) founder and CEO Angelo Mozilo cashed in $122 million in stock options in 2007.  His total take is estimated at more than $400 million dollars.

l Stanley O’Neal, who steered Merrill Lynch into financial collapse before it was taken over in a shotgun wedding with Bank of America in 2008, was given a package of $160 million when he retired.

l Bear Stearns former chairman Jimmy Cayne, rescued by a $29 billion Fed shotgun wedding to JPMorgan Chase, received $60 million when he was replaced;

l Fannie Mae CEO Daniel Mudd received $11.6 million in 2007. His counterpart at Freddie Mac, Richard Syron, brought in $18 million. In 2008, the two were forced into government conservatorship.

via Washington Post.

As Ritholtz pointed out, things weren’t always this way.  Once most Wall Street firms were partnerships, and the partners went into personal bankruptcy when their firms failed. Their mansions, yachts, automobiles and even their watches were auctioned off.  During the 1970s and 1980s, the big partnerships became public corporations, and the principle of limited liability meant that the owners were only on the hook for what they put into the firms, not for what they took out of them.

It’s not practical to turn the Wall Street firms back into partnerships.  Instead Rithholtz suggests legislation to make corporate executive personally responsible for reckless management and to claw back their excessive compensation.  I think that’s an interesting idea.  A better idea, in my opinion, would be to make the corporate decision-makers criminally liable for criminal actions of a corporation.

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