I might seem to be picking on JP Morgan this week (where, ironically, several of my friends and former students are employed), but we can blame the NY Times, who has a new article every morning about the financial behemoth.* Yesterday JP Morgan agreed to pay $2.6 billion in exchange for receiving a deferred prosecution agreement for its involvement in the Madoff pyramid scheme. You see, Bernie kept most of his big bank accounts at JP Morgan, and evidence (those damn emails again!!!) shows that as early as 1998, JP Morgan had reason to suspect that Madoff was a fraud. The bank, like all others, is legally required to file an SAR (Suspicious Activity Report) in such an instance, but did nothing. Well, not exactly nothing. The bank protected itself in last 2008, when it reduced its investments in Madoff’s funds by 80% and vetoed a $1 billion deal because Madoff refused to show the bank his books. (Hiltzik, LA Times)
The $2.6 billion payment comes on the heels of a $13 billion fine paid for fraudulent mortgages. All told, JP Morgan has paid $20 billion to the government in the last year. This should be a time of great celebration down in the Southern District of NY, where most of these cases are prosecuted. Preet Bahara, the U.S. Attorney in Manhattan, has been on an epic winning streak, winning trial after trial in white collar cases, and going hard after banks like JP Morgan in ways we have really never seen before.
And yet, Ferrari dealers of New York can relax and realtors in the Hamptons can rest easy, because the JP Morgan bankers can all expect to receive their usual generous bonuses this year. JP Morgan continues to flourish despite all of these fines and prosecutions, because it is making so much money. In all seriousness, I am not one to trash bankers for getting bonuses, but the JP Morgan example raises a serious legal and ethical question: are banks too big to punish? If $20 billion doesn’t “hurt” the criminal defendant, what will?
A deferred prosecution agreement is viewed as a slap on the wrist. This is an agreement between the government and the company that the government will not prosecute unless the company fails to meet certain requirements, such as additional compliance. Think of it as probation for a company.
Well, according to Judge Rakoff of the Southern District of New York, we need to go after more individuals. I tend to agree; no organizational punishment will keep the many individual bankers in a huge place like JP Morgan acting ethically. Throw a few of those bankers in jail, and people might start to pay attention. This is classic deterrence theory. The problem is that many behavioral economists don’t believe deterrence works. Dan Ariely thinks that deterrence doesn’t work; no one thinks about long term punishment before breaking the law. In most cases, we take little steps down that slippery slope towards breaking the law. No bankers woke up deciding to break the law and ignore Bernie Madoff. But, according to Ariely, we all have a small “fudge factor” that allows us to cheat in small ways, cut some corners, and still rationalize that behavior. The problem comes when, as at JP Morgan, all those cut corners add up to a big mistake with dire consequences.
So, what do we do? I have started examining another version of this problem: academic integrity. The vast majority of students are ethical and want to do the right thing. But in my opinion, we still have cheating at SMG (although no more so than any other university). We are just beginning our efforts, but our preliminary hypothesis is that we need to change the culture. It has to be socially unacceptable to bend the rules, cut corners, plagiarize, and look over your classmate’s shoulder. Students have to be willing to come forward whenever they see cheating, and those students (and faculty) who report academic misconduct should be celebrated, not shamed. I am not sure how we will get there, but I think we are on our way with our new emphasis on ethics. At SMG we must “walk the talk” on ethics in order to change our culture. It might be easier to change the culture at SMG than at JP Morgan, but it is too early to say. In the meantime, the prosecutors will keep busy, and JP Morgan will continue to set aside of a reserve of legal funds. The winners in all of this mess? The lawyers!
*Huzzah! Always wanted to use that word.
22 Comments
Patrick Ng posted on January 8, 2014 at 4:17 pm
If the penalty is but a drop in the bucket for doing business, perhaps big banks see the fines as a cost of doing business. HSBC got fined a few thousand dollars for transferring millions for Hezbollah. We don’t treat banks like we do individuals because they simply are too big to punish.
Jonathan Goodlow posted on January 9, 2014 at 12:40 pm
I disagree with saying that deterrence doesn’t work. I think that personally for me as I grew up, knowing several people who have had to go to jail/prison let me know that it was real and it could happen to me. I think that the problem with deterrence and bankers is that the punishments that they see their colleagues go through are not severe enough to stop them from committing the same crimes. If someone they know ends up going to a country club of a prison, they really have no reason to be scared.
Professor SPooner posted on January 9, 2014 at 6:41 pm
Throw the book at them! Seriously, I have visited several federal prisons and prison is never great (although federal are better). See, for example, the TV show Orange is the New Black, based on a federal women’s prison in Danbury, Connecticut. Not fun. Sentences have changed over the last 15 years or so, and white collar defendants get much longer than they used to. We can discuss more tomorrow.
Nathan Myat posted on January 9, 2014 at 8:38 pm
HSBC had been caught before because I remembered seeing this clip a while ago. http://www.thedailyshow.com/watch/thu-july-19-2012/hsbc–helping-people-who-want-to-kill-you-since-1991
Hunger for success is great, but greed is a real danger. Money laundering like this fuel terrorists and dictators. Governments need to bring harsh prison terms to top level directors of these organizations as exemplary punishments instead of fines.
Won Lee posted on January 9, 2014 at 9:59 pm
I totally agree with what you are saying that ‘we need to change the culture’ as a beginning effort, because the banks in my country are not legally punished as well due to the thoughts that they are too big to be punished and, in my own view, government is afraid of punishing the banks.
However, to me, changing our culture seems to be a long way to go even though it is the best and right way we should take.
I try to come up with a more immediate and easy way for the problem, but, as most of us expect, there seems to be no other way.
Jie Gong posted on January 9, 2014 at 11:13 pm
I think $2.6 billion is nothing as punishment for JP Morgan. When deterrence is too soft, it’ll turn into encouragement of big banks’ legal and ethical misconduct.
Oneyoung Choi posted on January 10, 2014 at 1:04 am
I definitely agree with the idea of ‘too big to fail.’ Like Won Lee says, in South Korea, it has happened. In the government’s perspective, it is better not to punish its company harshly based on the government’s math calculation. I hope this kind of incidents get corrected as a nation develops.
Chingho Wu posted on January 10, 2014 at 7:13 am
The culture of the bankers made them easy to get into a slippery slope. When the benefit of short term achievements overshadow the punishments, bankers are willing to take on more risk to exploit the system and eventually breaking the law. There should be a punishment system that clearly warns bankers that “You will end up in jail if you continue this path.” Otherwise paying fines is just part of the business for them.
Peter posted on January 10, 2014 at 8:13 pm
Newsflash, another white collar criminal has been spotted in lower manhattan. This time, the individual clearly had a history of dishonesty. Rachel, to your earlier point about academic integrity, I think there is a need to punish cases of academic dishonesty harshly, and more often. Otherwise, once out of the academic bubble, some of people can get out of control. Surprising that this individual was expelled from Harvard Law School and that he got a job in such a cut throat environment.
Peter posted on January 10, 2014 at 8:13 pm
Sorry, here’s the article: http://dealbook.nytimes.com/2014/01/09/ex-sac-trad
Njideka Onuekwusi posted on January 11, 2014 at 8:18 am
Peter, thank you for sharing that article. It was very interesting! Mr. Martoma obviously has a strong history of deceit and dishonesty. He deserves to go to prison for a very long time! What I find most interesting is that he would go through the trouble of changing his name and then continue to act in a dishonest manner. He had the opportunity to start over with a new identity and change his ways. Instead, he chose to be deceitful on a larger scale. I don’t feel sorry for him at all and I absolutely agree with Jon. I think the punishments for white collar crimes are too lenient. Maybe if we start sending white collar criminals to real prisons, they would change their behavior.
Katharine Bullman posted on January 11, 2014 at 10:22 am
Organizations are only as good as the people that work for them – they are hypotheticals, basically made up communities. I see two sides to the story (1) it is the duty of the executives/governing body of a company to craft an environment that does not allow fraudulent behavior to perpetuate (but honestly, think of how difficult it would be to institute this in a multinational company) (2) no matter how much effort is put into creating such an environment, there will always be a few bad apples that go beyond the boundary of legality (and sometimes will take it way too far). Honestly, it seems like prosecution of large companies is just simply not working. The fines and the negative PR from these cases are not making an impact. I agree with Jon, it’s time to go with a different approach, let’s make examples of these people.
Paulina Carpenter posted on January 12, 2014 at 6:15 pm
I also agree that the actual punishment for white collar crimes is not being sufficient to stop huge companies, as JP Morgan, to committing this kind of crimes. They might as well continue taking this as a “cost’ of doing business(as Patrick said) while bringing many more billions in their accounts. Deterrence should be enforced, but with punishments greater that fines that can set an example to bankers involved in this kind of practices. The fines paid by JP Morgan are not affecting any of the employees, quite the contrary, they are still getting their bonuses. If this situation continues, what is the motivation for employees to act ethical? If people’s greed starts to grow in this money-based market, some people’s values can change quickly if there are no serious punishments for these kind of white collar crimes.
Chunghee Ryu posted on January 12, 2014 at 11:34 pm
Although for a giant bank punishment would not be enough to stop committing white collar crimes, it might be at least a motivation for individual bankers to be reluctant to doing those crimes. Just knowing that punishment would make each individuals ethically challenged when they are about to do something wrong. I believe it might be a first step to change culture.
Paulina Carpenter posted on January 14, 2014 at 9:59 am
Just found this article today talking about JP Morgan setting aside $23 billion to cover its different legal costs. In the video contained in the article, they explain why banks are too big to jail. Found it very interesting, hope you do too.
Paulina Carpenter posted on January 14, 2014 at 10:00 am
Forgot the link:
http://money.cnn.com/2014/01/14/investing/jp-morgan-earnings/index.html
Shannon Herlihy posted on January 14, 2014 at 11:46 am
I just saw this on CNN this morning. Despite all of their legal problems, JP Morgan is still raking in the dough. In fact, they earned $5.3B in the final quarter of 2013.
http://money.cnn.com/2014/01/14/investing/jp-morgan-earnings/index.html?source=cnn_bin
Shannon Herlihy posted on January 14, 2014 at 11:47 am
Oops! It’s the same as Paulina’s article. Needless to say, it’s worth a look.
Lillian Chen posted on January 14, 2014 at 3:31 pm
The fine for JP Morgan seems just as a slap on the wrist for violating the law. However, the fines pale in comparison to what they are making. This makes it difficult to deter other people from committing the same acts.
We can all SAY that we are ethical and won’t do certain unethical acts, but when it comes down to it, it’s hard to really know what someone will DO. However, I do believe there are factors that can make us more ethical. I think it also has something to do with how we were brought up.
I do feel, and hope, that the more we are taught to recognize ethical pitfalls and more importantly, the more we practice/identify frameworks we can use to avoid falling into these pitfalls, the better we are off when we do encounter these situations in our careers.
Jake Kelly posted on January 14, 2014 at 7:13 pm
It’s almost like the mob mentality where people don’t feel bad because typically both sides are willingly “in the game.”
In my opinion, the public seems largely unsympathetic toward these types of financial victims, which is probably why the courts go relatively easy on the criminals. Just the rich stealing from the rich — nothing to see here folks.
Plus this specific incident seems too far removed from the offense. They basically just didn’t “rat-out” the real criminal, Madoff, who they didn’t know for certain was actually a criminal. It definitely doesn’t justify their actions by any means, but jail time seems too excessive for turning a blind eye. However, I do agree that punishments toward individual financial criminals should include more jail time. It would certainly deter me more than a fine to my employer.
Sean Wiedemeier posted on January 14, 2014 at 10:54 pm
I think the case of those at JP Morgan who didn’t report suspicious activity of Bernie Madoff in the 90’s is interesting, but it may not be an isolated incident. It appears that fines to the bank aren’t much of a deterrent for the reasons given in the comments, and this makes the supervisors less stringent. Likewise, many of those perpetuating the crimes might think the odds of going to jail are slim. Over the past week we have learned of some creative punishments and rewards for white collar crimes/whiste-blowing. What if all those in the direct hierarchy above a law-breaker at a bank were forced to give up their bonuses/take a pay cut in the case of wrong-doing or looking the other way? That might lead to closer supervision than the prospect of a ‘slap on the wrist’ fine to the corporation or the slim odds of someone doing time.
Michaela Ragaisis posted on January 27, 2014 at 1:38 pm
Unfortunately, money makes the world go round. Money is power and so many people are willing to break the rules, give up ethics, and honestly ruin other people’s lives to get a big paycheck and bonus.
In your example of cheating in SMG, money is a connection. SMG is very competitive and all of the students want to graduate and get a job where they will make good money. So if they feel the pressure and start to panic, their ethics will go out the window. They will cheat so they can get the good grade, pass the class, and make money. People are all too willing to break the rules and forgo their values because they are so motivated by money.
JP Morgan is a prime example of a company with people who are addicted to and motivated by money. Once you have that kind of money, you won’t want to take a pay cut and you may be willing to do shady things to make even more money. The JP Morgan scandal goes into a question of ethics, corporate social responsibility, and maybe requires an examination as to why the justice system is not cracking down as hard as they should on these big businesses.