Financial Stars Behind Bars?

Jan 28, 2013 Luigi Zingales

Hardly a day goes by without a financial settlement between a bank and a US government agency, which invariably brings an end to the investigation. But recent academic research points to widespread, purposeful misrepresentation by banks, highlighting the need to address the industry's culture of deception by prosecuting wrongdoers.

CHICAGO – Hardly a day goes by without a settlement between a bank and a US government agency or regulator. The latest one is between Bank of America and the government-backed mortgage underwriter Fannie Mae: $3.55 billion in cash; $6.75 billion in repurchases of bad mortgages that Countrywide, later acquired by BoA, sold to Fannie; and an additional $1.3 billion in cash to resolve Fannie’s servicing issues with BoA.

And yet, as in most settlements, BoA did not admit any fault. Was BoA tripped up by bad luck or sloppiness? Or did it and other financial institutions behave with intent to defraud investors?

As a result of the settlement, we will never learn the truth (at least the version that is established beyond a reasonable doubt in open court). In each settlement, the investigations are stopped, and whatever has been found is sealed.

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Luigi Zingales

Writing for PS since 2008
23 Commentaries

Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, and serves on the Committee on Capital Markets Regulation. He is also a faculty research fellow at the National Bureau of Economic Research, a research fellow at the Center for Economic Policy Research, and a fellow of the European Governance Institute. He is the author of A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.

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Ken Presting Jan 31, 2013

It's instructive to read an article like in comparison to the libertarian/GOP leaning Prof. Boskin's "Taming Leviathan."

According to the right, it's only government bureaucrats who cannot be trusted with public funds. The misdeeds of financiers are seldom mentioned by those authors.
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Frank O'Callaghan Jan 30, 2013

The criminals have been exempted from consequences. These settlements are a joke and both sides in the negotation are criminal in their conspiracy against the people.
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Mark Pitts Jan 29, 2013

If we know about criminal activities at banks, the Justice Dept. and the President know as well. Yet there have been few prosecutions. This means those in the Obama administration are part of the criminal conspiracy.
- James Edwards Feb 1, 2013
  
  It seems that you put the blame on one person when it is the complicity of different roles that created this problem. For one it was the Republicans (when they were in charge) that put legislation that allowed much of the damage to continue unchecked despite hearings that exposed the problems from consumer groups.
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Venu Madhav Jan 29, 2013

Nice article Dr. Zingales. Coming from an Operations Research background I would lobby for empowering the Risk Management group and also make them directly responsible for any wrong doings in data collection and other related practices that can happen within the firm, thus not only they get empowered but more importantly will become the champions for a clean-up and hopefully avoid undesirable situations. How do you see the change if the Risk groups report to the BoD firm that way the Board takes the first blame?
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MK Anon Jan 29, 2013

Thank you Dr Zingales, very persuasive

And now we can think also of the almost 1% of the american population who is in jail for petty crimes, stealing cell phones or shoplifting to feed.. We can also think of Julian Assange who is now political refugee for telling the truth... while those that steal huge amounts of money, decrease social welfare and put the system at threat while producing nothing end up extremely rich.
They should be sent to jail.. and not only a few of them. All of them !! But there is no justice, we are not equal ... or rather some are more equals than others..
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Paul Mathew Mathew Jan 29, 2013

Excellent article. Throw a few of these crooks in jail and the message will get out loud and clear.

Is that going to happen?

I very much doubt it. The Corzine case was as open and shut as a case could be yet they did not even investigate.

America is now a bastion of crony capitalism.
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