Too Big To Jail

February 22, 2012

Too Big to Jail: It sounds familiar!

by Simon Johnson

Among the fundamental principles of any functioning justice system is the following: Don’t lie to a judge or falsify documents submitted to a court, or you will go to jail. Breaking an oath to tell the truth is perjury, and lying in official documents is both perjury and fraud.

These are serious criminal offenses, but apparently not if you are at the heart of America’s financial system. On the contrary, key individuals there appear to be well compensated for their crimes.

As Dennis Kelleher of Better Markets has argued, the recent so-called “robo-signing” settlement – in which five large banks “settled” their legal liability for carrying out fraudulent foreclosures on mortgages – is a complete sell-out to the financial industry.

First, there was no serious criminal prosecution – meaning that no one will be charged with a felony, and no one will go to jail. In terms of affecting executives’ incentives, this is the only thing that matters.

Even the terminology used to frame the discussion is wrong. Kelleher, an attorney with extensive experience in private practice and the public sector, tells it like it is: “‘robo-signing’ is massive, systematic, fraudulent, criminal conduct.” Alternatively, as he points out, we could just call it “lying, cheating, and stealing.”

Second, the civil penalties in this settlement – a form of fine – are minuscule relative to the size of the companies involved. As Shahien Nasiripour, one of the best reporters on this issue, dryly put it: “None of the five lenders have said they expect to incur a material charge due to the settlement.” In other words, from a corporate perspective, the penalty is a trifling affair.

Third, such fines are, in any case, paid by the companies’ shareholders, not by their executives or board members (all of whom carry insurance). In the rare cases in which fines have been levied on individuals, either their insurance policies picked up most of the bill, or the penalties were trivial relative to the cash compensation that they received while committing their crimes – or both.

As if all of this weren’t bad enough, the banks reportedly will be able to use government money to write down the value of mortgages, which amounts to subsidizing them to pay their own meaningless fines.

The Obama administration and its allies have worked hard to sell its roughly $20 billion settlement with the banks as one that will have a meaningful impact on the housing market. But nothing could be further from the truth. As Kelleher points out, the United States has “more than 10 million homes under water” (the outstanding mortgage exceeds the house’s value). “Twenty billion dollars doesn’t make a dent in that: one million homes at $20,000 loan forgiveness is it.”

In fact, the Obama administration’s settlement with the mortgage lenders is consistent with its track record on all of its policies related to the financial sector, which has been abysmal. But it is also puzzling. Why would the administration continue to bend over backwards to be lenient towards top bankers under these circumstances?

I honestly do not believe that the administration’s stance reflects any form of corruption – payments made to individuals or even to political campaigns. And, in this case, it does not even appear to reflect the lobbying power of big financial players. That power certainly explains why the Dodd-Frank financial reforms enacted in 2010 were not stronger, and why there is now so much opposition to effective implementation of that legislation (for example, there is currently a huge fight around the “Volcker rule,” which would limit proprietary trading by megabanks). But mortgage lenders’ criminal activities are another matter.

Indeed, at stake in the mortgage settlement are fundamental and systemic breaches of the rule of law – perjury and fraud on an economy-wide scale. The Justice Department has, without question, all of the power that it needs to prosecute these alleged crimes fully. And yet America’s top law-enforcement officials have consistently – and now completely – backed off.

The main motivation behind the administration’s indulgence of serious criminality evidently is fear of the consequences of taking tough action on individual bankers. And maybe officials are right to be afraid, given the massive size of the banks in question relative to the economy. In fact, those banks are bigger now than they were before the crisis, and, as James Kwak and I documented at length in our book 13 Bankers, they are much larger than they were 20 years ago.

Top bankers want to make a lot of money. They also want to stay out of prison. Political leaders can huff and puff as much as they want, but, without a credible threat of poverty and time behind bars, bankers have no reason to comply with the law. For them, it’s all about the trade – and you can be the sucker in public policy as easily as you can be the sucker in an individual loan agreement.

The message to bank executives today is simple: build your bank to be as big as possible – and then keep growing. If you manage to become big enough, you and your employees are not just too big to fail, but also too big to jail.The Obama administration has just made everyone else the sucker.

Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog,, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-author, with James Kwak, of 13 Bankers.

Copyright: Project Syndicate, 2012.

5 thoughts on “Too Big To Jail

  1. Sounds familiar? In Malaysia, the lesson to learn is this: if you are well connected and know enough to threaten to bring down some big political bosses, past and present, you are too big to jail. The Tajuddin Ramli -GLC out of the court settlement is a case in point.

    Life is unfair, but that is life. The ordinary traffic cop can go to jail for taking a bribe for 2 years or more, but the rich and powerful get to keep their ill gotten gains. Karl Popper and Friedrich von Hayek, you do not understand the Malaysian government but you both are right about totalitarianism and absolute power. Tyranny rears its ugly head, when the Rule of Law is abandoned and the Judiciary is compromised.–Din Merican

  2. Asian Leaders are following in the footsteps of their Arab counterparts. Most of them are illiberal leaders who do not want to change their ways with the advent of the Internet Age which has placed information at the tip of a mouse. The wrongdoings go unpunished and the word retribution has been obliterated from the dictionary.

    Refusal to take head on corruption will be the single most important policy failure that will determine the future of Asian countries. And do not be fooled by the general war cry in the West that this is the Asian century.The Arab countries are finding that out the hard way now and some of them are at the point of no return.

    From Cambodia to Sri Lanka and from Pakistan to Indonesia the outlook is the same. We are all illiberal and do not want to do anything about it. This is fine so long as the foreign exchange keeps poring in like in China, Japan, Korea and Taiwan. But once that drys up even well healed countries will not be able to control a situation like the Arab Spring. We may talk about these issues in blogs but the truth is that slowly we are going down the slippery slope of no return.

  3. Anonn,

    Retribution takes a long time because absolute power reigns supreme like in Syria, where citizens are dying everyday because the Syrian Army won’t back down. Bashir al-Assad is entrenched because he has the Army with him and some major foreign backers to ensure that his regime survives. And he has all the resources to outlast the political opposition and subdue the protesters. That is the scenario at this time. Arab spring is giving way to repression by the use of overwhelming power. –Din Merican

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