Send the Suits to Jail

Mike Konczal on corporate fraud:

I don’t get people who downplay the sheer volume of consumer fraud that went on in the subprime mortgage market, and the fact that the market decided to reward this fraud. Take Household Finance in the early 2000s. Their aggressive lending practices where people would learn after the fact that they were mislead to how much their total monthly payments were (as well as many other problems) lead to successful settlements in Colorado, Georgia as well as a $484 million in fines joint settlement with a group of attorney generals, the largest consumer fraud settlement in U.S. history.

….So Household Finance has to pay the largest consumer fraud fines in history. I bet you think that the investment community and elite financial institutions wouldn’t look twice at it. Well, you’d be wrong. One month later Household was acquired by HSBC, the London financial giant, for $16.4 billion. The New York Times columnist Floyd Norris called this “the deal that fueled subprime.”

This, of course, is the difference between people and corporations. (Well, one of them, anyway.) For people, crimes are considered moral lapses. Even after you pay your penalty or serve your time, a person convicted of a crime is treated as less trustworthy, less employable, and less honorable than before.

But a corporation? Civil penalties are simply considered a cost of doing business. There’s no real moral valence to it at all. If the fine is small enough that the corporation is still profitable, then it’s all good. So HSBC might have lowered their price for Household Finance a smidge, but certainly nothing more than that.

This is an unusually stark example of the principal-agent problem at work: a civil fine mostly just hurts shareholders, who had nothing to do with the fraud in the first place and have very little real-world ability to stop it. Criminal charges hit the executives who do — and it’s one of the reasons that we probably ought to be a little more willing to pursue criminal charges against executives of companies that either knowingly commit fraud or negligently allow it. Perhaps HSBC would have been a wee bit more hesitant to buy Household Finance if they’d known that the culture of the place didn’t merely cut into earnings a bit, but might end up sending a few of the suits on mahogany row to prison for a couple of years? The conservatives I talk to seem to have a considerable confidence in the deterrent power of such things.

$500,000 MATCHING GIFT

In 2014, before Donald Trump announced his run for president, we knew we had to do something different to address the fundamental challenge facing journalism: how hard-hitting reporting that can hold the powerful accountable can survive as the bottom falls out of the news business.

Being a nonprofit, we started planning The Moment for Mother Jones: A special campaign to raise $25 million for key investments to make Mother Jones the strongest watchdog it can be. Five years later, readers have stepped up and contributed an astonishing $23 million in gifts and future pledges. This is an incredible statement from the Mother Jones community in the face of the huge threats—both economic and political—against the free press.

Read more about The Moment and see what we've been able to accomplish thanks to readers' incredible generosity so far, and please join them today. Your gift will be matched dollar for dollar, up to $500,000 total, during this critical moment for journalism.

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate

We have a new comment system! We are now using Coral, from Vox Media, for comments on all new articles. We'd love your feedback.