Opinion

Bethany McLean

Does jailing executives make much difference?

By Bethany McLean
January 22, 2013

In the aftermath of the 2008 financial crisis, the most commonly heard complaint has been: “Why hasn’t anyone gone to jail?” This past May, Newsweek asked, “Why Can’t Obama Bring Wall Street to Justice?” and Forbes wondered, “Obama’s DOJ and Wall Street: Too Big for Jail?” Even Rupert Murdoch’s New York Post recently chided the president because “not a single Wall Street fat-cat has been charged with violations of securities laws in connection with the 2008 collapse.”

There are many explanations — and plenty of conspiracy theories — about why this is the case, but there’s a different, more important question that needs to be asked: Has sending people to jail fixed anything?

Think back to the post-Enron years. The government convicted roughly a dozen former Enron executives, including former CEOs Kenneth Lay, who died awaiting sentencing, and Jeffrey Skilling, who is serving a 24-year prison sentence, and took accounting firm Arthur Andersen to trial, resulting in its demise. During that era, former WorldCom CEO Bernie Ebbers, former Quest CEO Joe Nacchio and former Adelphia executives were also convicted for misdeeds.

The goal, of course, was to deter future wrongdoing by those who don’t want to play by the rules, and those whose
appetite for risk could destroy a company. After that string of prosecutions, pundits (including yours truly) said that the world — or at least the business world — would be a much safer and steadier place.

Hmmm. By 2007, just one year after Lay and Skilling were convicted, the financial crisis, which had been decades in the making, was about to come crashing down on our heads. Part of the problem is that in corporate America, the odds are still very much in favor of those who game the system because the government, even at its most aggressive, doesn’t have enough resources to go after everyone. In addition, the rules create loopholes that clever people exploit, violating the spirit while still remaining within the letter of the law. On top of that, a lot of what most of us would call wrongdoing doesn’t involve intent — a necessary ingredient for a criminal prosecution. Instead, you find the very human capacity for self-delusion — and, sometimes, sheer stupidity.

Another big part of the problem is that there’s too much money to be made by pushing the envelope, or by keeping your mouth shut when you see others doing it. One Wall Streeter explained it to me this way: “When you work on Wall Street, you have a seat. If you stay in that seat, you know you’ll make a small fortune. So you look around, and you see things going on that you don’t think are right. But you’re not sure — let’s face it, in the modern world, you’re almost never sure… So you have a choice: Leave, forfeit your seat, and watch everyone who stays make a fortune. Or stay, get yours, and when [trouble comes], well, you were just one of the crowd.”

When you probe more deeply into this dilemma you realize that outright crime and envelope-pushing are only subsets of what’s wrong in the bigger crime is that people are being paid huge sums for failure. A banker recently told me the financial crisis was one of the greatest heists in financial history, because so many people made so much money not by succeeding or creating but by failing and destroying. Stan O’Neal drove Merrill Lynch into the ground and walked away with retirement funds and securities worth $160 million. Citigroup CEO Charles Prince got almost $14 million in cash right before Citi began to hurtle toward collapse. And countless inept or crooked junior people, whose names we’ll never know, walked away with fortunes.

In a recent report, veteran analyst Mike Mayo at CLSA noted that the link between bank performance and CEO compensation is weak. Mayo says CEO pay has almost doubled over the past decade, growing more quickly than revenue or profit and almost twice as fast as employee compensation. Over the past decade, Citigroup and Bank of America have had the highest CEO pay and the worst performance. This isn’t an issue that afflicts only the financial world— it is a problem across corporate America. James Stewart recently wrote in the New York Times about Leo Apotheker, whose brief, miserable tenure as the CEO of Hewlett-Packard earned him more than $13 million in termination payments. The Motley Fool notes that Gregg Engles, the CEO of Dean Foods, has received an average of $20.4 million annually over the past six years even as his company’s stock price has fallen 11 percent a year, on average.

Every year, Forbes puts together a list of the worst CEOs based on performance relative to pay. In 2011, Engles got the top honor, but close behind him was Mayo Shattuck of Constellation Energy, whose average annual compensation has been close to $15 million, while shareholders have seen only a 6 percent total return during his tenure. There are countless more examples. So maybe it shouldn’t be people’s liberty at stake but rather their money. Pay people for success — long-term success — that benefits all stakeholders, from shareholders to employees to communities. While that won’t completely eliminate self-delusion, it will certainly help, because it’s often money that blinds people to the improprieties they should see. Unfortunately, there’s nothing easy about administering this cure. The history of attempts to tie pay to performance isn’t a pretty one. Start with stock options. It’s hard to think of a better way to align executive and shareholder interests, but it seems that once people have pocketed enough in cash, or sold enough stock, that alignment goes askew. In its post-mortem on Enron — where the top 200 executives made over $1 billion from stock options in that company’s final year — the Joint Committee on Taxation wrote, “The Enron experience raises a potential conflict between short-term earnings from which executives can reap immediate rewards and longer-term interests of shareholders.”

Under Dodd-Frank, the Securities and Exchange Commission must devise rules so companies disclose how compensation is paid and how it’s linked to performance. Public companies will need to have “say on pay” votes for shareholders. And there are clawback provisions. Goldman Sachs employees who get stock grants are subject to forfeiture and clawback provisions if, for instance, they fail to flag risks that could hurt the firm or the financial system. When JP Morgan suffered a $6 billion trading loss last summer, the executives deemed responsible had pay clawed back for about the last two years. There is also a faint glimmer of hope that shareholders, who have long been silent on this issue, are ready to speak up. Last spring Citigroup shareholders rejected a $15 million package for then-CEO Vikram Pandit (who, by the way, pocketed $6.7 million in compensation for less than a year of work after the board abruptly fired him in October). These changes all seem like lurches in the right direction. Public shaming and even prison sentences haven’t had much impact on malfeasance, so let’s put our energy into ranting about pay, rather than prosecutions, and maybe we can get CEOs thinking more about shareholders, employees and investors than their own overstuffed wallets.

PHOTO: Protesters march through New York’s financial district during a rally against government bailouts April 3, 2009. REUTERS/Brendan McDermid

Comments
34 comments so far | RSS Comments RSS

Does it make much difference? Yeah, it really does!

Posted by tmc | Report as abusive
 

It is reasonable to believe that punishment may not be an effective deterrent when rewards are so great. However, equity demands that white collar crimes be punished as severely as blue collar ones.

Posted by sandblast | Report as abusive
 

Since free for all does not work for long. there has to be rules and enforcement as well as an effort to make the action to be stopped culturally unacceptable.

Right now there is the problem that the Fed cannot force banks to make good monetary policy and Fed work through the banks for most part. So in banking we need enough rules so the banks do not look for profits but for following the Fed’s direction. Lots of luck, unless the Fed owns them. They will loan money to every one in inflation and sell the loans and loan no one in a recession. The opposite of whet the Fed needs to do.

Posted by Samrch | Report as abusive
 

Since free for all does not work for long. there has to be rules and enforcement as well as an effort to make the action to be stopped culturally unacceptable.

Right now there is the problem that the Fed cannot force banks to make good monetary policy and Fed work through the banks for most part. So in banking we need enough rules so the banks do not look for profits but for following the Fed’s direction. Lots of luck, unless the Fed owns them. They will loan money to every one in inflation and sell the loans and loan no one in a recession. The opposite of what the Fed needs to do.

Posted by Samrch | Report as abusive
 

Since free for all does not work for long. there has to be rules and enforcement as well as an effort to make the action to be stopped culturally unacceptable.

Right now there is the problem that the Fed cannot force banks to make good monetary policy and Fed work through the banks for most part. So in banking we need enough rules so the banks do not look for profits but for following the Fed’s direction. Lots of luck, unless the Fed owns them. They will loan money to every one in inflation and sell the loans and loan no one in a recession. The opposite of what the Fed needs to do.

Posted by Samrch | Report as abusive
 

Since free for all does not work for long. there has to be rules and enforcement as well as an effort to make the action to be stopped culturally unacceptable.

Right now there is the problem that the Fed cannot force banks to make good monetary policy and Fed work through the banks for most part. So in banking we need enough rules so the banks do not look for profits but for following the Fed’s direction. Lots of luck, unless the Fed owns them. They will loan money to every one in inflation and sell the loans and loan no one in a recession. The opposite of what the Fed needs to do.

Posted by Samrch | Report as abusive
 

“…there’s a different, more important question that needs to be asked: Has sending people to jail fixed anything?”

Yes. Just like the carjackers and the gangbangers and the meth manufacturers and the people who steal air bags or copper cable or tubing for melt down at about a penny on the dollar, it keeps them off the streets and out of out pockets.

Like the fisherman who hollers at the girl at the beach picking up stranded starfish and throwing them back in the ocean: “You can’t save them all”! She answers back: “No, but I can save (or remove from society) that one (toss-splash) and that one (toss-splash), and that one…”.

The “experts” have determined if you paint out graffiti as soon as it appears, you have less gang problems and graffiti thereafter. Why would serious enforcement of our rules, regulations and laws with jail time not be effective on those considering executive (and government) malfeasance? Seems worth a try to me!

Posted by OneOfTheSheep | Report as abusive
 

That leaves me feeling let down. Bethany you come across as being so much more intelligent than this blog piece suggests. I don’t believe its at all fair to pass this watered-down version of financial malfeasance into the collective conscious of the casual reader. This is so much more than a few bad CEOs.
________________________________________ ___________________

Securities Fraud
Forgery
Municipal Bid Rigging
Rep & Warrant Fraud
Inter-Bank Rate Rigging
Aiding Tax evasion
Money Laundering
…If i’ve missed any please feel free to add any of your favorites.

———————————————————–

Its an a priori assumption that if I walk away from a store with merchandise that there was intent.

Posted by Laster | Report as abusive
 

I liked the article, but does it support the ‘grabber’ thesis in the title? The Industry knows that infringements are rarely tied to individuals, rarely result in charges, and more rarely result in anything other than fine. I doubt that the outlier-event of Enron penalties would be seen as THE change in the norm of enforcement and punishment in the industry. And, infringements leading to the collapse were well underway, as indicated, by the time Enron penalties were meted out.

Also, I believe the lack of legal response to the shenanigans causing the collapse, and with respect to Public bailouts, has reinforced the status quo much more than the sum of penalties over the last decade, including Enron, have weakened it.

Interesting information in the last paragraph, I was unaware of the clawback provisions. Although if the behavior is unethical or illegal, but makes net profit for the share-holders, does not the motivation for clawback vanish?

Posted by ConstFundie | Report as abusive
 

End the War on Drugs, it hasn’t fixed anything…

Posted by Anonymous | Report as abusive
 

Come on guys, we’re being a bit to nice. She’ll get a promotion or higher access from this opinion.
As Fox news has well proven, the title of the article is far more important than than the contents. Very few read the contents, and less comprehend. Titles can be splashed over viewing time and become the truth before they are even aired.
Let’s face it, If I were Vicram Pandit reading this, she would quickly be my favorite blogger of the day.
Of course, she may not have actually titled this piece too.

Posted by tmc | Report as abusive
 

Ok so we put people in Jail for Murder, yet it still happens, so I guess we should just stop jailing people for it……
Thats the logic isn’t it? Actual right or wrong, just to fuzzy to get all hard azzed about it huh….if its good olde bankers…..

Posted by AVGJoe2 | Report as abusive
 

Humm what do they do in China for corruption? Oh yea death penalty……..maybe we let too much slide by with 2 years in country club prision, and your still multi-millionare when you get out.

Posted by AVGJoe2 | Report as abusive
 

The independent rule of law, that all are equal before the law demands that these people be prosecuted.
These people have effected more damage and suffering than terrorists.
Consider wrecked marriages, suicides and broken futures. I could go.
These people are real criminals, doing enormous harm.
Maybe we should emulate the Chinese. A bullet to the back of the head and send the bill for the bullet to their families.

Posted by Juillet14 | Report as abusive
 

How about imposing fines amounting to whatever the ill-gotten gains were (and some jail time, too)? This would follow the model of how common bank robbers are handled.

Posted by bcrawf | Report as abusive
 

How about imposing fines amounting to whatever the ill-gotten gains were (and some jail time, too)? This would follow the model of how common bank robbers are handled.

Posted by bcrawf | Report as abusive
 

Plausibly jailing miscreant CEOs does little to deter others but at least THOSE guys are in jail. The purpose of the criminal code shouldn’t be so much directed at deterrence as it should be toward making transgressors pay a price.

WRT the ridiculous pay packets that these CEOs award themselves (and let’s not kid ourselves who really sets their pay), I offer two suggestions. One, anyone whose pay (as in salary, stock options, bonuses, &etc paid in remuneration for employment) is over, say, $5M/yr gets taxed on the overage at 80% say. Two, any company that pays its CEO more than 24X the average worker’s pay (with smaller multiples for lesser executive officers) can’t deduct the amount of their pay above 24X in their cost of goods sold line.

When I listen to the idiots in Washington (and elsewhere) babble about job creators and I realize that they are talking about the Vicram Pandit’s and Leo Apotheker’s of the world, it makes me want to puke.

Posted by majkmushrm | Report as abusive
 

Ms McLean,
What part of “Systemic crookery is bad for the country” don’t you understand?

Posted by JBookly | Report as abusive
 

Majority of comments – want back to USSR ?

Posted by yurakm | Report as abusive
 

It makes a difference, because if the law is not followed, and they are willfully not prosecuted, then we do not live under the rule of law.

However, the DOJ themselves have admitted that they have not pursued prosecution because of the far reaching economical impact such prosecutions could have.

We no longer live under the rule of law. We are truly ruled by men.

Posted by Jameson4Lunch | Report as abusive
 

@Jameson4Lunch,

Excellent point well stated. BRAVO!

Posted by OneOfTheSheep | Report as abusive
 

So why is competition such a wonderful thing for the low wage laborer but not the high wage banker? I’m talking about the money monopoly here. If currencies (banks) could compete just the same as every other private industry, then the people subscribing to that currency could withdraw their support and issues like this wouldn’t happen. It happens, because it’s the only ting that CAN happen. Bankers know that they have the entire nation under their control. Let’s not forget why these people aren’t in prisons. As Rothschild said “Give me control of a nations money supply and I care not who makes their laws”. Well, they care not!

Posted by LysanderTucker | Report as abusive
 

This is one pathetic essay. I recall reading that over 500 bank executives were convicted in the fallout to the S&L scandal (no idea how many went to jail, but many did). Clearly, the banksters figured out in the intervening years how to break the spirit of the law without technically violating it, at least not so’s anyone can get a conviction. The requirement to prove intent is ridiculous — it should be enough to show “should have known” and/or dereliction of due diligence.

Does it matter if they serve jail time? Does it matter if the society at large believes that the system is rigged to protect its elites regardless of how much damage they do? Does it matter if what pittance of social cohesion we still have is finally shredded?

As pointed out by other posters, there’s lots that can be done to align CEO pay more closely with performance, but there are many corporate officers with far less incentive to cheat (i.e. far less compensation) who colluded in this as well. Throwing a bunch of them in jail will certainly give pause to those who are considering aiding and abetting that over-paid CEO.

Does it help to throw them in jail? Well it sure doesn’t hurt!

Posted by Sanity-Monger | Report as abusive
 

One could use exactly the same reasoning to question why anyone should be sent to jail for any crime.

They don’t know it’s wrong?! Having worked in that rarified environment of big financial companies including Citigroup and Countrywide, it is easy to state that most of them were very aware that it was wrong, but essentially went unpunished, so excusable, even mandatory. Then, the percentage of sociopaths at that level is much higher than the average.

This is one of the most contradictory articles written in some time.

Posted by ptiffany | Report as abusive
 

Does jailing execs make a difference? Are you f****** kidding me? Do two wrongs make a right?

Perhaps we should refrain from jailing these ‘job creators’ for other offenses, like murder and rape. We can make a card for them, with security features and photo ID. Whenever they are about to go to jail they can just show the card and, hey, it’s all good. Jail is for poor people, after all.

Or maybe we can make special jails for the rich, with tennis courts and saunas…

Posted by UnderRated | Report as abusive
 

Jailing executives is a further waste of our time and money.

These people are recidivists (i.e. repeat offenders).

I suggest we employ instead the tried and true methods that have worked in the past.

The French Revolution comes to mind as an excellent example of what to do with these people.

(For those of you who would argue the French Revolution failed, I would point out that this cannot be a one-time effort, but must be repeated as necessary until the cancer is removed.)

Posted by PseudoTurtle | Report as abusive
 

The major white collar criminals are smart people who can hire really expensive legal talent. The current sentences are wrist slaps when the ratio of $gained/expected sentence are considered. We need to give the prosecutors the funding to level the playing field and to increase the expectation value of the sentence (probability of conviction * years sentence) to a level that is a real deterrent. Also true life sentences (no club fed, no parole) should be on the table for crimes $10 million and up. Intent should not be a real question for CEOs unless the their high dollar lawyers bamboozle the jury.

Posted by QuietThinker | Report as abusive
 

The independent rule of law demands that where the law has been broken those responsible must be held to account.
If not we no longer have a democracy, we are officially a plutocracy.
This is a cowardly article by Ms. McLean. The sociopathic wanton greed that drove the perpetrators of these crimes must be contagious.
Slip your Louis Vuitton aboard the Gulfstream G550 and head off to Davos to reap your reward.

Posted by Juillet14 | Report as abusive
 

i disagree hugely with Ms. McLean. Even if the bad guys win in court—because the government isn’t able to prove their guilty—that doesn’t mean they’re innocent… so there is a shame factor even when beating the wrap, and even for people who obviously have no shame.
More importantly, there’s also the statement by society that this behavior is not acceptable. Why should it take a private lawsuit to bring out the specifics (names and emails) detailed, for example, in yesterday’s NY Times DealBook (http://dealbook.nytimes.com/?p=549349)?
As a taxpayer, I’d be willing to pay for the government to bring that out, and for it to be on the nightly news instead, of just PBS Frontline.

Posted by ConnieHawkins | Report as abusive
 

I have yet to see a valid argument for not prosecuting someone if all the evidence points to a prosecutable offense.
Destroying the rule of law is as great a danger to the U.S.A as any outside terrorist threat.

Posted by Anontwo | Report as abusive
 

Would it make a difference? Who knows – we haven’t tried it yet and probably never will.

Posted by AZreb | Report as abusive
 

We don’t know because we haven’t done it yet. Does jailing drug dealers work? How about murderers or rapists? Or, more to the point under Obama, how about whistleblowers?

As long as the banksters are allowed to legally bribe Obama and the US Congress, they are immune from prosecution.

If we stopped wasting the resources of the Justice Department chasing low level drug dealers and alien smugglers, we would have plenty of resources to overwhelm any Bank exec no matter how many law firms represent them. I know, I have seen it and done it. Civil lawsuits against them are much more time and resource consuming than criminal prosecutions. The cases against the Goldman – Sachs execs were slam dunk convictions. The US is a government of the banksters, by the banksters and for the banksters.

Posted by jklfairwin | Report as abusive
 

“Does jailing executives make much difference?”

Put the executives in jail and then ask THEM if being in jail makes much difference to them.

Posted by my_screen_name | Report as abusive
 

I am certain a great sigh of relief has been exhaled by executives who read this article and say – “Oh great, the propaganda machine is going to mollify the public and keep pressure off the politicians and judicial system.” Keep up the good work Bethany.

Posted by keebo | Report as abusive
 

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