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Bank Fines: Fail

December 20, 2013

I’ve been meaning to write something on this since I saw an article in the Guardian last week discussing the latest fine to hit US investment bank JP Morgan – a punitive $2bn settlement over accusations that some at the bank suspected, but did not report, suspicious activity by Ponzi-scheme fraudster Bernard Madoff. The most striking thing about the article, however, is not the details of this particular fine, but the final paragraph in which this latest punishment is set in the context of the rest of JP Morgan’s year:

‘If the fine comes before Christmas it will cap an annus horribilis for JP Morgan. Alongside the $13bn fine for its involvement in the subprime loan scandal, JP Morgan has:

  • ‘paid $4.5bn in November to settle allegations it has mis-sold mortgage bonds to pension funds and other institutional investors;
  • ‘paid $920m in September to settle US investigations into the “London Whale” trading scandal;
  • ‘in the same month, paid another $390m in refunds and $80m in settlement for billing credit card customers for identity theft protection they did not receive;
  • ‘paid $410m in penalties and repayments in July related to alleged manipulation of California and midwest electricity markets;’
  • I have gone on a bit in recent posts about the way that fining public corporations – particularly banks – penalises those with relatively little culpability (shareholders) at the expense of those who actually participate in corporate wrongdoing (CEOs, directors, and employees). The example of JP Morgan illustrates another implication of this failure. Not only will the punishments fail to deliver retribution for the wrong done, but they will fail to act as an effective deterrent so long as those who actually make the decisions are not called to account.

    What possible justification is there for continuing this wrong-headed approach to dealing with corporate wrongdoing? Is it simply based on the legal ideal (rather than practical reality) of corporate governance in which businesses are run by directors acting as agents for, and carrying out the wishes of, shareholders?

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