Crime Pays

In a recent post on the Center for Effective Government, Katherine McFate wrote about how banking executives avoided any criminal prosecution for the many financial crimes committed in recent years. In her article, “Time for Three Strikes and You’re Out for Banks,” she notes that, unlike the period during the S&L crisis, when executives served prison time, no banking official has suffered a similar fate since the 2008 crisis. She suggests that a “three strikes” mechanism should be put in place so that if a bank is found guilty of committing three violations of banking laws, its culpable executives would be banned from a range of activities, including working in the financial sector, as a way to deter executive misbehavior.

What Ms. McFate and many others seem to have overlooked is the fact that there is no financial disincentives for banking executives to change their behavior. Despite the fact that banks and other financial institutions have been fined billions of dollars in recent years, at the end of the day, these institutions pay the fines, which offset any earnings these institutions have made.

Who is punished? Shareholders.

So who are these shareholders? Well, they are you and me. Do you have an IRA or a retirement account? Do you own shares in a mutual fund? Then chances are you own a piece of the banking industry. So to close the circle on this perversion, ordinary people, who were impacted by the financial crisis were penalized for the criminality that led to the crisis.

While I think that Ms. McFate’s idea is an interesting one, what we really need is a more direct deterrent aimed at executives of these companies. Currently, when a bank is hit with fines in the hundreds of millions or billions of dollars, the trend is to give executives a raise. Going forward, bank executives should be fined as well, to the point of “pain.” This means that they can lose their pensions, stock options, the jet, the house in the Hamptons and the apartment in Manhattan. Once this happens, perhaps these criminals will finally wake up.

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