Delayed negative feedback on the financial crisis

The wheels of justice grind slowly, but they grind exceedingly fine:

Too Big to Fail or Too Big to Change

While the SEC has reached several settlements in connection with misconduct related to the financial meltdown, those settlements have been characterized as “cheap,” “hollow,” “bloodless,” and merely “cosmetic,” as noted by Columbia University law professor John C. Coffee in a recent article. Moreover, one of the SEC’s own Commissioners, Luis Aguilar, has recently admitted that the SEC’s penalty guidelines are “seriously flawed” and have “adversely impact[ed]” civil enforcement actions.

For example, Judge Jed Rakoff castigated the SEC for its attempted settlement of charges that Bank of America failed to disclose key information to investors in connection with its acquisition of Merrill Lynch (“Merrill”), including that Merrill was on the brink of insolvency (necessitating a massive taxpayer bailout), and that Bank of America had entered into a secret agreement to allow Merrill to pay its executives billions of dollars in bonuses prior to the close of the merger regardless of Merrill’s financial condition. The SEC agreed to settle its action against Bank of America for $33 million in August 2009, even though its acquisition of Merrill resulted in what The New York Times characterized as “one of the greatest destructions of shareholder value in financial history.” In rejecting the deal, Judge Rakoff declared that the proposed settlement was “misguided,” “inadequate” and failed to “comport with the most elementary notions of justice and morality.” …

It has increasingly fallen to institutional investors to hold mortgage lenders, investment banks and other large financial institutions accountable for their role in the mortgage crisis by seeking redress for shareholders injured by corporate misconduct and sending a powerful message to executives that corporate malfeasance is unacceptable. For example, sophisticated public pension funds are currently prosecuting actions involving billions of dollars of losses against Bank of America, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Bear Stearns, Wachovia, Merrill Lynch, Washington Mutual, Countrywide, Morgan Stanley and Citigroup, among many others. In some instances, litigations have already resulted in significant recoveries for defrauded investors.

Historically, institutional investors have achieved impressive results on behalf of shareholders when compared to government- led suits. Indeed, since 1995, SEC settlements comprise only 5 percent of the monetary recoveries arising from securities frauds, with the remaining 95 percent obtained through private litigation ….

I think the problem here is that litigation works slowly. It’s not clear that punitive legal outcomes occur on a relevant time scale. Once bonuses have been paid and leaders have moved on, there are no heads left to roll, so organizations may only learn that they’d better have good lawyers.

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