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On Corporate Crime and Glass-Steagall

Business Groups Take Left Flank

by RUSSELL MOKHIBER

On corporate crime, business executives, corporate think tanks, business magazines and newspapers are starting to take the left flank of both the Republican and Republican parties.

No leaders of the Republican or Democratic Party are calling for tougher sanctions against corporate criminals. In fact, you will rarely find a politician on the national stage from either party using the term “corporate crime.”

No leaders of the Republican or Democratic Party are calling for the return of Glass Steagall, the depression era law that separated the investment from the commercial units of banks.

But business executives, free market think tanks and business magazines are starting to say yes – crack down on corporate crime, bring back Glass Steagall.

Last week, the Economist magazine ran a long article and editorial calling for tougher sanctions against corporate crime.

“At the moment, it seems, some corporate crimes pay handsomely,” the Economist declared in an editorial last week asking Is Crime Rational?

“Banks, drug companies and weapons makers have all been stung with record fines recently,” the Economist wrote. “But while fines keep going up, corporate rule breaking – for example, the LIBOR banksters – seems to be booming. Why aren’t high fines deterring bad behavior?”

“One reason could be that the fines, which can be seen as the price of crime, are too low. The economics of crime would support this idea. Many crime economists use a framework set out by Gary Becker of the University of Chicago. The idea is that would-be criminals rationally weigh up the expected costs and benefits of breaking the rules. If the probability of being caught or the level of fine is too low, then the expected costs might be outweighed by the benefits.”

Similarly, earlier this month, USA Today editorialized for more criminal prosecution of corporate executives.

In an editorial titled Fight Corporate Crime with More than FinesUSA Todayconcluded with this – “The way to change criminal behavior is with criminal penalties. In the finance and drug industry scandals, they’ve been too scarce.”

Eamonn Butler, director of the Adam Smith Institute, a free market think tank in London, took to the pages of the Wall Street Journal last week with a startling lead sentence – “More readers of this paper ought to be in jail.”

In an opinion article titled Charge the Criminals, Not the Companies, Butler quotes former New York Attorney General Eliot Spitzer as saying – “The only thing that will work is CEOs and officials being forced to resign and individual culpability being enforced.”

And Butler would give shareholders much more power to run the companies they own – and he would hold them accountable for corporate wrongdoing.

“I would like to see much greater power given to shareholders to run their companies. It is their money,” Butler told Corporate Crime Reporter in an interview last week. “They are the ones who profit from it. And therefore they should have the power to run it without heavy handed regulation from the state which robs shareholders of a great deal of power.”

Then you have the case of Sandy Weill, the former CEO of Citigroup, who engineered the repeal of Glass Steagall, the Depression era law that led to the consolidation of the big banks.

Last week, Weill called for the breaking up of the big banks.

Then you have Phillip Purcell, former chairman and CEO of Morgan Stanley, taking to the pages of the Wall Street Journal arguing that breaking up the big banks will make them better investments for shareholders.

Last week, Purcell wrote an op-ed article in the Journal titled Shareholders Can Cure Too Big to Fail.

“I spent the better part of 20 years aggregating financial businesses to achieve the benefits that can come from institutions that have a variety of products and services,” Purcell wrote. “The benefits were considerable and they still are. However, the market is now discounting the stock prices of financial institutions with investment banking and trading. Breaking these companies into separate businesses would double to triple the shareholder value of each institution.”

“The five obvious too-big-to-fail institutions – Bank of America, Citigroup, J.P. Morgan Chase, Morgan Stanley and Goldman Sachs – have a median stock-market value of considerably less than the values of those component businesses they own that have predictable earnings streams, strong franchises and established client bases,” Purcell wrote.

“Breaking up these banks and isolating their investment banking and capital-markets businesses solve the shareholder-valuation problem. And by not allowing investment banks to fund the assets on their balance sheets with insured deposits, the risk to taxpayers is largely reduced.”

Recently retired Citigroup chairman Richard Parsons put the blame on the financial crisis on the repeal of Glass-Steagall.

“To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall,” Purcell said earlier this year. “Have we gotten our arms around it yet? I don’t think so because the financial-services sector moves so fast.”

I’m not sure the words “corporate crime” or “Glass Steagall” have ever publically crossed the lips of President Obama or Mitt Romney during this campaign.

My guess is they haven’t.

But their corporate buddies are starting to pay attention.

Maybe they should too.

[For the complete transcript of the Interview with Eamonn Butler, see 26 Corporate Crime Reporter 30, July 30, 2012, print edition only.]

Russell Mokhiber edits the Corporate Crime Reporter.