How can Bob Rubin be made to suffer for banking crisis? (Long, no-doubt-ignorant rant

DISCLAIMER: I have no idea what Rubin stands for or looks like. I couldn’t pick him out of a police lineup, and I know almost nothing about banking. Probably the things I think I do know about banking are wrong.

But I use Rubin as an example (Paulson will do equally well) of a banking bigshot who profited grossly by the now-acknowledged totally screwed-up system of lending money to people who couldn’t afford to pay it back–by “Rubin” I mean pretty much anyone who earned bonuses during the years the banking industry seemed profitable, but was actually flushing our economy down the shit-chute. It seems to me that, from a perspective of bare-bones fairness, that such people committed some sort of fraud. If they were sanctioning taking risky bets (as they have clearly demonstrated they have, by the current economy) but instead of investing its profits against the day that these risks might manifest themselves, the banking industry disbursed their profits to individuals, like Rubin and Paulson and maybe 10,000 other investment bankers, who bought property and airplanes and wine-cellars and all sorts of personal shit with the money.

I’m not complaining (I don’t think I am) about an individual’s right to accept a high salary from a private company, but rather about an industry that pays high salaries and also disburses its safeguards to individuals during “boom” times, without a thought to needing that money when the boom times are over. That, it seems to me, borders on criminal negligence, especially since we’re now acknowledging that the country cannot allow these banks to fail. IOW, they weren’t merely raiding their own private companies’ coffers, which would be bad enough, they were also endangering the national economy.

If Obama can’t find a way to fix the economy these guys wrecked that will also serve as an object lesson to future bankers not to try this ever again–and by that I certainly mean collecting huge sums in damages from the bankers personally, and ideally long jail terms to boot (even if the money’s collected are a drop in the bucket, which they probably are)–I would suppose that his credibility will be damaged. The whole tenor of his campaign was that of change and fairness, and I don’t see making economic heroes of these fools or thieves or (most likely) financial criminals representing either element.

Sure, in order to make an economy work, he’ll have to keep some of these guys on board, but I see it as a necessary evil in very small numbers, akin to letting one crook pleabargain his way out of a life sentence that will go to his twenty-five confederates. Aren’t there loads of bright young MBAs who haven’t yet profited by this looting who could be promoted to serve under the few honest investment bankers (and a few selected criminals willing to help Obama prosecute their fellows) in creating a whole new economy, with the example of these crooks suffering, if not in jail then at least in disgrace with a vastly diminished wealth?

Purely symbolically, I’d think that would be a desirable way to go, and sends a powerful message to future greedmongers. Certainly, I hear that message at my job every time I ask for a raise: No, you can’t have a raise just now because the institution you work for needs the money in order to insure that it survives and thrives, so we need to invest in infrastructure and other assets that represent the institution’s future financial strength. The other message, that their institution’s bulging coffers represents individual profits way beyond their salaries instead of going back into the institution’s own holdings, is at the root of this wrecked economy, it seems to me, because it encouraged them to pursue foolish mortgage-policies that brought in short-term profits, and the only way to get the message across that the principle of looting a thriving company is wrong must start with the prosecution of those who caused this crisis to happen.

If there’s any point to this rant, it may be: Why can’t the bankers be prosecuted for fraud? They either could foresee the results, in which case it’s clearly fraud, or they couldn’t, in which case it’s negligence leading to fraud. The spectacle of billionaires and millionaires overseeing the economy they personally ruined, while getting to keep their ill-gotten riches, really toasts my shorts, as you can see.

These bonuses were to all intents and purposes fraudulently awarded. They could not have performed their jobs any worse than they did. Every cent of every bonus paid to anyone working in the financial sector should be retrospectively seized.

My question, however, remains: since they were operating under laws that allowed to make the foolish, greedy, short-sighted and counter-productive decisions that they did, how can any of those assets be restored, and how can they be made an example of for future bankers to consider as warnings? The fact that you and I would think this a modicum of justice won’t allow for it happen simply by our wanting it. Is there any legal basis for considering what thousands of bankers did as committing fraud, as the law defines it, however loosely?

I believe these people, like with Enron, knew full well what they were doing. They just didn’t care. Criminals or just criminally incompetent - either way there needs to be a huge reckoning.

Fix’d a few typos in the quote above.

But, tagos, redress won’t occur simply by our wanting it. Under what construction of anti-fraud legislation, RICO statutes, embezzling laws, etc. can this be legimately prosecuted? I’m not hearing a whisper of such a course of action spoken about, despite all the talking heads decrying the actions of bankers over the last few years, making me think nothing will be done to Rubin and others like him. They’ll simply get to live protected against the depression we will endure for years. Am I right?

Yes.

What you’re describing isn’t criminal conduct. The fact that someone negligently performed their job, created a huge financial mess, and still got a big bonus for it is not illegal. It’s not criminal fraud. And it’s not even civil fraud, unless you think that these people concealed some material facts that they knew to be true from their stockholders. But that’s not what happened – they laid out their plans clearly for their boards of directors and their stockholders. It’s just that their plans tanked – no fraud involved.

Right. By law, they weren’t doing anything illegal. But having the economy tank because of certain activities has made us rethink whether or not these activities should be legal. So while some form of retribution would be viscerally satisfying, the only sensible choice is to take a hard look at some of these practices and decide whether we should allow them going forward.

If you can go around the world buying up people to torture and abuse in secret prisons legally you can do anything.

Put the words ‘Conspiracy to …’ in front of something and release the hounds.

Until Sarbanes -Oxley they could get away with anything. Now there are some standards and penalties. The act attempted to put some responsibility on those who run the company. They always claimed they did not know the financial numbers were enhanced. They signed the final audits but claimed no responsibility.
Then they tried to split the auditors from the corporation. The auditors were in bed financially with the companies . SOX attempted to split them.
There is a lot more. But there at least are some rules now.

I think executive compensation is something that needs to be looked at and I say this as someone who is quite sympathetic to the idea that strong monetary incentives can often have a beneficial impact on corporate performance.

However the example of Chuck Prince being given a severance package of $67million after adopting policies that have destroyed perhaps more than $200 billion of shareholder value certainly gives me pause. This isn’t a case of dynamic managers being rewarded for great performance. Often it’s a case of powerful insiders using their position to reward themselves no matter what happens.

You could argue that shareholders as owners of the company should take responsibility but it just doesn’t work that way. Shareholders are too dispersed and too weak to challenge powerful executives for the most part. And as we have seen CEO incentives particularly in the financial sector have powerful consequences for the rest of the economy.

What restrictions to impose I don’t know. It isn’t an immediate priority and it requires a lot of careful discussion. But certainly once the current crisis has blown away the Obama administration and Congress needs to take a long,hard look at executive compensation and what the government can do to improve incentives.

I guess part of my point is that these industries are coming to the government and saying “We need a handout” and I’m not really getting why the government can’t respond by saying, “Okey-dokey, but since you want something wholly outside the normal boundaries of governmental interactions with a privately held company under a capitalistic system, here’s what we need first:” and then procede to outline what needs they have, up to and including the heads of executives of pikes, bonus monies repaid to the corporation’s coffers, etc. No can do? Okay, try bankruptcy, asshole.

The problem is they are the government. They make the rules that govern them ,they eliminate regulation and control the politicians. They are essentially coming to themselves and saying what can we do to fix this problem in a way that won’t cost us money,won’t get us in legal trouble and will convince the American sheeple that we have their interests at heart. It is a tough sell but many believed them. I do not trust them at all.

and where does a corporation get the power to breach its contracts with its employees and officers?

Suppose Joe Blow is CEO of ABC. Inc. and his employment contract says he gets $50 million from the ABC Inc on termination, regardless of the financial health of the corporation.

If ABC Inc. terminates Mr. Blow and refuses to pay the $50 million, the next step will be Blow v. ABC Inc. in the courts: Mr. Blow suing for breach of contract plus damages. Unless there’s a clause in the contract that says the termination amount will be reduced for poor performance, the courts will rule in Mr. Blow’s favour.

Now, if some of the management personnel of one of these corporations plan on staying on to try to fix the mess, they could voluntarily re-negotiate their compensation packages. But if the gov’t insists that current management be sacked (at least, I hope that’s all that your “heads on the pike” reference means :eek: ), why would the sacked management have any incentive to re-negotiate to a lower salary?

It’s not criminal for a corporation to negotiate stupid contracts with its management, any more than it’s criminal for a corporation to loan money to bad credit risks with no security. The market is intended to fix that stupidity. It’s the government that’s not following the model here, by not letting the market do its ruthless work.

Your points are well taken. I just want to be assured that if I’m going to invest tax money into resurrecting an industry that the all-sacred free marketplace has destroyed that I will get something (other than “screwed”) out of the deal. An industry that accepts voluntary pay limits for execs would be a start, as would any regulations that made the business’s long-term success more of a goal than short-term personal profits. If the industry is too important to be allowed to go bellyup, then it has some responsibility to remain profitable, and that means that executive compensation must take a back seat to corporate well-being.

The market does not do its ruthless work. The companies are in cahoots not in competition. They have done a great job of setting it up so that no matter what happens the execs will make out big time. This competition thing is an obsolete illusion that was addressed in the 1900s. Companies do not want to compete. They want to carve up a market and jack up profits and executive wages.

Why should “anyone working in the financial sector” have to pay back their bonus? Do you think the financial sector is one big monolithic organization?

This is the crux of the problem. There are imposing institutional obstacles to shareholder participation in the decision-making process. The result is that corporate boards have little or no oversight or accountability and can loot or destroy companies essentially at will.

Even if it were easier for shareholders to participate, it wouldn’t solve the problem, because shareholders wouldn’t normally have enough information about corporate strategies and risks to exercise oversight effectively.

I’m not sure what system of corporate oversight would work better, but the one we have sure isn’t working.