Whether GM or banks, some companies are still too big to jail
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.
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.”.
By 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.
Individual 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