Willie Sutton Tax as New Policy

Chidem Kurdas

Jed Rakoff, the U.S. Judge for the Southern District of New York who is known for his distinctive opinions on financial cases, has written a fascinating article for the New York Review of Books.

He explains why no high-level executives have been prosecuted in the aftermath of the financial crisis. Individual wrongdoers are not prosecuted, he argues, in part because the policy now is to go after companies.

Indeed, threaten a bank with criminal charges and you will extract hundreds of millions of dollars from it, if not billions. This is what I’ve called the Willie Sutton tax – with respect to JP Morgan – after the Brooklyn bank robber who gave the pithy answer to the question, why do you rob banks?

In the article Judge Rakoff does not cite any particular recent case; his broad aim is to show that the easy prosecutorial route of making deals with financial companies is not the best policy. But his post-crisis rulings illustrate the point—-he refused to approve settlements with Bank of America and Citigroup.

Technically, he writes, you should not indict or threaten a company unless you can prove that the crime was committed by its managerial agents—-but if you have such evidence then you should prosecute those agents, not the company.

He objects also that, to quote from the article, “punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.”

As I pointed out in the previous post on Madoff and JP Morgan, litigation costs largely pass through a large bank to its customers as well as shareholders. So in reality it is our pensions that are being punished, but this is a roundabout and widely distributed effect that people don’t notice.

Another reason individual executives are not prosecuted for mortgage fraud, Rakoff suggests, is that the various arms of the government are implicated in creating the conditions for such fraud. Thus an accused executive “might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do.”

By contrast, going after financial companies is low risk from the point of view of public officials because companies are almost certain to agree to pay fines and institute internal reforms. There is no contentious defense in front of a jury to point a finger at government entities.

The judge’s focus is on mortgage fraud. But similar issues arise elsewhere, for instance in the new Madoff case against JP Morgan that resulted in the bank agreeing to pay $2.55 billion. In the Madoff Ponzi scheme parts of the government would not stop the conman despite 16 years of warnings. This reassured investors that there was no fraud. Read Ponzi Regulation Chapter titled “Honey Jackpot.”

If you honestly wanted to prosecute individuals for enabling this Ponzi scheme, you would have to look at the employees of the U.S. Securities and Exchange Commission and possibly even closer to home, the office of the U.S. Attorney for the Southern District of New York—-incidentally, the same office that threatened to charge JP Morgan for not giving warning of Madoff.


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2 Responses to “Willie Sutton Tax as New Policy”

  1. JP Morgan Madoff Payment: Who’s a Victim? | HedgeFundSmarts Says:

    […] is a Willie Sutton case—-banks are where the money is, so sue the banks. The complaint against JP Morgan is questionable […]

  2. Protection Racket Jobs | HedgeFundSmarts Says:

    […] policy approach that follows the same basic logic as Willie Sutton the bank robber and has been criticized by a judge. The attacks also had the effect of pushing the bank to hire regulatory […]

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