Responding to criticism that he and other regulators had gone lightly in fining ten large Wall Street firms $1.4 billion for alleged conflicts of
interests, New York Attorney General Eliot L. Spitzer contended that
harsher penalties would have done more harm than good for the economy.
"We made a decision not to destroy these financial institutions," he
Never mind that some of the small investors who lost hundreds of
billions of dollars were themselves nearly destroyed because of the
misleading information they received from these bank and brokerage
analysts, who, for their own profits, continued to issue "buy"
recommendations even as companies' shares plummeted. Never mind that
even New York Times columnist Paul Krugman calls the fines a "slap on
the wrist". Never mind that after the settlement was announced Morgan
Stanley's chairman said: "I don't see anything in the settlement that
will concern the retail investor about Morgan Stanley. Not one thing."
Spitzer deserves his due. He filled a regulatory vacuum left by an under-staffed and weakly led SEC. He went after the biggest names on
Wall Street, exposing a culture soaked through with greed and
corruption. But Spitzer should also know that deterrence is an important
aspect of crime prevention. And the kid-glove penalties that Spitzer and other regulators meted out last week are hardly the stuff of deterrence.
Criminal enforcement actions are infrequent. The Wall Street firms, like
almost all corporate defendants, know that corporate crime prosecution budgets are so inadequate that state and federal agencies are
hard-pressed to enforce criminal laws for blatantly defrauding small
investors. With no credible threat and no credible deterrent, corporate
criminals, and then bigcorporate law firms, need not be worried.
For Citigroup, $300 million in fines and disgorgement is less than 1 percent of last year's revenues, which topped $92 billion. Likewise,
Credit Suisse First Boston's penalty of $150 million is barely pennies
on the dollar of the $56 billion in revenues it took in last year. These
fines come nowhere near the $7 trillion dollars that investors lost
since it became apparent that the corruption on Wall Street is endemic.
Truly shocking is that the majority of the settlement may yet be tax deductible and/or covered under insurance - everything except $487
million in civil penalties, according to Sen. Charles Grassley (R-Iowa),
head of the Senate Finance Committee.
On Monday, Grassley wrote: "The material made available to me so far indicates that limitations on tax deductibility and insurance
reimbursement do not apply to the $387 million in disgorgement, the $432
million in independent research, and the $80 million in investor
education." He plans to introduce legislation to guarantee that the
costs of all future government-imposed settlements regarding any alleged
violations are not shifted onto taxpayers.
Even more astonishing, however, is that these financial institutions and banks got off the hook without a single admission of wrongdoing. What
this means is that defrauded small investors, who already have had the
decks stacked against them by years of lawmakers' rolling back investor
rights to seek restitution in the courts (most notably the Private
Securities Litigation Reform Act of 1995), now will now have an even
more difficult time getting their day in court.
Spitzer notably made public a thick collection of Wall Street
communications that reveal just how callous many of these high-flyers were. One e-mail from a Lehman Brothers analyst stated "well, ratings and price targets are fairly meaningless anyway, but yes, the "little
guy" who isn't smart about the nuances may get misled, such is the
nature of my business." Spitzer said he released these documents for the
use of defrauded investors.
It is time for some old fashion reforms. Federal and state governments
must increase resources devoted to corporate crime enforcement. Congress
should also repeal the Private Securities Litigation Reform Act of 1995,
which made it more difficult for defrauded investors to sue. The only
way to end the corruption on Wall Street is to send a message that
securities firms engaged in defrauding small investors will be punished to the full extent of the law and their culpable top executives will be
convicted and sent to jail.
It is also time to break up the behemoth Wall Street financial powerhouses. The Republicans and Democrats spent the last decade repealing Depression era protections for investors and allowing
financial institutions to combine in unprecedented ways. Firms should
never be allowed to combine stock research, investment banking (selling
shares to the public) and brokerage (buying shares for customers). Firms
now have an ongoing incentive to provide rosy research and have their
brokerage firm push stocks on individuals that benefit not the
individuals, but the Wall Street firms' corporate clients.
Congress and state regulators need to bring back the Glass-Steagal Act,
which separated banking from investing and even extend it. Until the
research function is separated from the brokerage and investment banking
function completely, Main Street will not believe Wall Street and
certainly will not entrust it with their now plundered retirement
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