Employees at five banks colluded to earn supranormal profits in rigged markets (nytimes). Presumably they were rewarded by their employers with correspondingly huge bonuses. Those bonuses by now have been turned into beach houses, Gulfstreams, etc. The government comes along more recently and fines “the banks” $5.6 billion. But it seems to me that this fine has to be paid by the shareholders of the banks, not past, present, or future employees. If we assume a labor market the employees of banks are paid a competitive wage. So the banks that have been fined can’t reduce salaries or their better people will jump ship. Thus it will be shareholders who pay. But public company shareholders, due to SEC regulations that prevent them from directly nominating board members, exercise virtually no control over what actions bank employees might take. How then can this fine reduce the likelihood of similar behavior in the future? Wouldn’t a rational current bank employee still seek to collude with counterparts at other banks, rig a market, make huge profits for a while, take home and keep huge bonuses, etc. Why does the employee care if at some future date a shareholder will have to pay a fine because of his or her behavior?
I can speak with direct knowledge when I say that in at least some of the banks, the fine was in part paid by current employees in the forum of bonus claw backs and low (as low as zero in some cases) bonuses. It was the source of quite a bit of frustration from employees who not only had nothing to do with the scandal, worked in completely different departments and even different countries, but in fact were hired after the rigging took place. And yes, it led to some (but certainly not all) of them jumping ship. The decisions were made at levels and by people who I’m guessing didn’t personally suffer from the loss of the employees who left, but who would have suffered the political consequences of not making such “tough decisions”.
If you think that government is the only place where bureaucracy and politics create perverse incentives and inefficiencies, you clearly have never worked in a large bank (or other large corporation).
It won’t happen until individuals face prison time. Milken was imprisoned. After the S&L crisis, there were about 1000 prosecutions and 800 convictions. The 2008 meltdown dwarfs the S&L by at least 2 orders of magnitude, but so far nothing. Look no further than who bankrolled the Obama campaign to see why banksters were treated with diffident leniency.
this fine has to be paid by the shareholders of the banks
But, at the time, shareholders (and employees) profited from the banks’ wrongdoing. The fine is to be paid in the future, well after the wrongdoing and profiting. According to the efficient market theory, announcement of the fine immediately affected the share price, so current shareholders are punished. And funds to pay the fine must come out of earnings that cannot be used to the benefit of future shareholders (and employees), so they are also punished.
So, shareholders (and employees) that were around during the profitable wrongdoing, but were not around at the time the fine was announced (or more likely when the investigation came to light) are the beneficiaries.
@ND: Thanks for sharing your first-hand knowledge.
If you think that government is the only place where bureaucracy and politics create perverse incentives and inefficiencies, you clearly have never worked in a large bank (or other large corporation).
I don’t think anyone thinks this. I’ve worked in a large bank, a large non-bank corporation, and a large government agency.
“How then can this fine reduce the likelihood of similar behavior in the future?”
This is what theorists call an iterated game. And most shareholders vote with their wallets, not with their AGM representation. So …
Over repeated iterations, the fine could make shareholders and potential shareholders more careful about scrutinising the character of banks’ senior management and the rigour of their internal management systems. Since these are things that ought to be scrutinised heavily in an efficient system, such a result has some attraction.
That is not to say that such scrutiny will actually happen …
This is exactly why people, like Fazal Majid, are demanding prosecutions of these employees with the possibility of jail time. Not doing this -in violation of past precedents- was the single most significant action of the Obama administration.
I feel like we need some kind of corporate death penalty for felonious behavior by corporations. Sort of like an inverse chapter 11; a way to force them into some kind of bankruptcy-like receivership in which the assets of the company are sold off with employees, creditors, and stockholders getting paid or protected, but senior managers and officers stripped of their ill-gotten proceeds. (Employee stock grants and options would be nullified before the stockholders portion was calculated)
Hopefully this potential for disruption would drive some changes in corporate governance.