Opinion

Nicholas Wapshott

Whether GM or banks, some companies are still too big to jail

By Nicholas Wapshott
June 10, 2014

U.S. Attorney General Eric Holder speaks at a news conference at the Justice Department  in Washington

Attorney General Eric Holder is in the middle of a prosecuting binge against some of the world’s biggest companies. Washington’s attempt to bring such large corporations to justice is long overdue.

Tea Party and Occupy Wall Street protesters were furious that financial executives who brought the world to the brink of penury in 2008 paid no price for their reckless behavior. The anger became widespread when the U.S. justice system seemed incapable of bringing culpable individuals and companies to account.

Now a number of large firms are finally being forced to face the music and this notion of whether a company can be “too big to jail” is being tested. Last month, General Motors agreed to a fine of $35 million for failing to respond soon enough to faulty vehicle ignitions that contributed to the deaths of 74 drivers.

Financial institution representatives are sworn in before testifying at the Financial Crisis Inquiry Commission hearing on Capitol Hill in WashingtonProsecutions of other corporations are in the works — including the culmination of the investigation into fixing the LIBOR interbank overnight rate.

Last month, too, Credit Suisse acknowledged its part in a criminal attempt to hide its American depositors’ cash from the U.S. federal tax authorities and agreed to pay a $2.5 billion fine.

Early this month Holder moved against the French mega-bank BNP Paribas, threatening a $10-billion fine — equivalent to the bank’s total 2013 pretax income — for evading U.S. sanctions against Iran, Sudan and Syria between 2002 and 2009. This echoes a similar case against HSBC, which was levied $1.9 billion in December 2012 for helping its clients avoid U.S. sanctions against Iran, Libya, Sudan, Burma and Cuba.

Now that big companies are being prosecuted, amid public clamor for punishments on wrongdoers, however elevated they are, the question is: Is justice being done?

Holder appears to be of two minds about fining large companies. In March last year he explained to the Senate Judiciary Committee that when it came to banks and multinationals, there is indeed such a thing as “too big to jail.”

“I am concerned that the size of some of these institutions becomes so large,” Holder noted, “that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy.”.

General Motors CEO Barra and GM Executive Vice President Reuss await Barra's testimony before the Senate Commerce and Transportation Consumer Protection, Product Safety and Insurance subcommittee in WashingtonBy May 2014, however, Holder changed his tune — saying the notion of “too big to jail” was wrong. “Some have used that phrase to describe the theory that certain financial institutions, even if they engage in criminal misconduct, should be considered immune from prosecution due to their sheer size and their influence on the economy. That view is mistaken,” he said in a carefully calibrated statement on the Justice Department website.

One key problem in fining large companies is that many of those obliged to pay did not own stock when the crime was perpetrated. Public companies, by their nature, change.

As Heraclitus of Ephesus put it thousands of years ago, “You can never step into the same river, for new waters are always flowing on to you.” Stocks are churned over the years a crime was committed — and only those left holding the shares when the music stops, and the federal agents strike, pay the penalty.

But that obvious miscarriage of justice is a misleading means of understanding how shareholder democracy works in practice. In the mythical theory of how business works, those who own stocks and shares and are entitled to vote at shareholders’ annual meetings are wholly responsible for a company’s management and its conduct.

In reality, of course, the vast majority of shareholders play no part in the running of a company. The key executives and a small number of owners and institutional investors chart the course and most shareholders go along for the ride.

Consulting materials engineer Mark Hood poses in the mechanical testing laboratory at McSwain Engineering, Inc. in PensacolaIndividual shareholders find it next to impossible to make their voices heard, as their many failed attempts to curb excessive executive pay show. Owning shares is an example of responsibility without power. And being caught with a stake in an offending company can prove expensive.

Individuals found responsible for errors of judgment, or who presided over the company when the offenses took place, are rarely punished. Though in the cases above, some medium-ranking executives have been fired, the line of responsibility rarely reaches the very top — where the moral compass of the company is set.

Those who work for the company, who may have had little direct involvement with the wrongdoing, are made to suffer, as large fines affect the company’s profitability and its ability to invest in future growth. The offending company’s customers, too, may suffer higher prices as the fines are passed on.

Fining large companies, then, is hardly an exercise in justice. Most of those punished are innocent bystanders. In the case of the fine against General Motors, U.S. taxpayers may pick up the tab. GM is considered such an important part of the economy it has received subsidies from federal and state sources amounting to $3.57 billion — of which it is now expected to hand back $35 million.

As Holder points out, the impact on the wider economy, both at home and abroad, may be affected by altering the status of one of the small number of key players in a sector.

The example usually cited is the accounting company Arthur Andersen, brought to its knees in 2002 when it obstructed justice by shredding documents pertaining to the Enron fraud. Justice was served — after a fashion — when the company all-but collapsed. Though the real price was paid by the employees. Just 200 jobs were left in a workforce that once boasted 28,000 employees in the United States and 85,000 worldwide.

What, then, is the purpose of imposing fines on a company if the penalty has little bearing on the individuals who committed the crime and merely adds to the sum of human misery? The answer is simple: not much.

Yet, such is the byzantine nature of the crimes, and so ingenious the attempts to cover them up, it is only the threat of a massive fine, or jail for key executives, or closure of the entire company that motivates senior employees to cooperate with federal investigators.

In his appearance before the Senate Justice Committee, Holder urged Congress to amend the law to make the process more fair. Until lawmakers decide they wish to make prosecutions easier to bring or make bosses more culpable for crimes committed on their watch, innocent shareholders and employees will continue to be punished for crimes they did not commit.

But since there appears to be no appetite in Congress for making it easier for the government to prosecute private businesses — injustice will continue to prevail.

Nicholas Wapshott is the author of  Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.

 

PHOTO (TOP): Attorney General Eric Holder speaks at a news conference at the Justice Department in Washington, March 19, 2014. REUTERS/Yuri Gripas

PHOTO (INSERT 1):  From left to right, Lloyd Blankfein, chief executive of Goldman Sachs Group, Jamie Dimon, chief executive of JPMorgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, chief executive of Bank of America, are sworn in before their testimony at the Financial Crisis Inquiry Commission and its first public hearing in Washington, January 13, 2010. REUTERS/Jason Reed

PHOTO (INSERT 2): General Motors Chief Executive Mary Barra (L) and GM Executive Vice President Mark Reuss (R) await Barra’s testimony before the Senate Commerce and Transportation Consumer Protection, Product Safety and Insurance subcommittee in Washington, April 2, 2014. REUTERS/Gary Cameron

PHOTO (INSERT 3): Consulting materials engineer Mark Hood poses in the mechanical testing laboratory at McSwain Engineering, Inc. in Pensacola, Florida, March 28, 2014. REUTERS/Michael Spooneybarger

Comments
11 comments so far | RSS Comments RSS

The fines are miniscule in comparison to the profits that were made on specifically the illegal activity. They are more like small insignificant taxations on their illegal activity. Democracy and Justice are dead.

Posted by brotherkenny4 | Report as abusive
 

This is not a perfect world. When the fear of God goes out of people then they do things just for money. If you dig around in General Motors you will find that truth and accountability died a long time ago in that company.

Posted by fred5407 | Report as abusive
 

Do not give in to corruption and greed…start right where you live, work and know the people.

Posted by mkhunt | Report as abusive
 

the rich control the country – they are hardly going to be prosecuted for doing what they want …

Posted by wilhelm | Report as abusive
 

But no one at the top got the ax; only those in middle management. So the real problem remains at GM and its very close to the top!

Posted by joe10082 | Report as abusive
 

If a company bankrupts, its top 3 ranks of executives should be jailed during the ensuing inquiry. They should be paid minimum wage for time served if and when the inquiry concludes.

Posted by JimTheDiver | Report as abusive
 

Corporations are organization, and when organizations commit crimes, that is organized crime. We have laws against organize crime. We hunt their leaders down and put them in prison. Who are the leaders of corporations? Executive management & the board of directors.

Posted by PaperTrails | Report as abusive
 

Quote: “innocent shareholders and employees will continue to be punished for crimes they did not commit.”

Precisely. The use of fines as punishments for corporate crime is not only misguided but absolutely wrong, because it is not stockholders (the principals) who have committed the wrongs, but managers (the agents) to whom stockholders have delegated responsibility. Until those executives are fined or imprisoned, there is an absolute miscarriage of justice.

Posted by PaperTrails | Report as abusive
 

Fine those who were board members and officers when the malfeasance took place. The message will be received.

Posted by borisjimbo | Report as abusive
 

Well Mr. Wapshott, you finally wrote an great op-ed. I agree with you 100%.

This shows that we live in an oligarchy, not a republic.
Welcome to the United States of Corporate America (The USCA).

Posted by tmc | Report as abusive
 

@TMC, your absolutely right!!!! Spot on.

Posted by KyleDexter | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •