Boards of Directors are kept creatures until unforeseen government actions panic them to think about what they should have been doing all alongpaying attention to risks taken by the managers. Government is now on the warpath against alleged corporate crimes. Will the governments current punishment cycle create panic in the Board at JPM
Remember AIG Eliot Spitzer, then Attorney General of New York, with eyes on the governorship, panicked the AIG Board over (largely unproven) charges against AIG concerning accounting issues. In 2005, the AIG Board fired Greenberg under threats by Spitzer to its insurance licenses. This left risk management controls to uninformed senior successors to Greenberg. (The new head honcho was Martin Sullivan who appears to have known nothing about what was going on at AIGFP and the Global Securities Lending unit). Look what happened to AIG subsequently The Government intervened, injecting capital to cover cash collateral demands that were threatening the solvency of AIG. Shareholder property was diluted.
Shareholders must realize that government is not a trustee of their property rights. In the current attack on JPM, the various government agencies have unleashed a Punishment Cycle. That syndrome is a blanket admission of prior regulatory failures during the 2003-2007 Credit Boom. Look at the role played by the GSEs in their own zeal to get into the subprime asset acquisition game. They were more than willing to insure dubious credit paper for a fee. If JPM is now accused of selling overvalued assets, the GSEs were more than willing buyers. If they were victims, they were not unknowledgeable dupes! They were envious of other insurers gaining profits that they wanted for themselves. After all, their managers worked under performance pay regimes as well.
The real bottom line to the Governments post-Bust punishment campaign is that the losers are still the shareholders. Who does the Government protect Is there a winner in this fracas In the short run, it might seem to be the taxpayerbut how realistic is that Depending upon regulators to help shareholders is a mug’s game. Regulators have their own special interests.
If shareholder protection was the goal, regulators would have partnered with markets so that there would be a continuous application of market discipline to miscreant managers and directors. That is not the case here. The governments Punishment Cycle is designed to make heroes of the very regulators who failed when they needed to be vigilant during the preceding Credit Boom. Who is rewarded by the Punishment Cycle Regulatorswho will move from government enforcement jobs to the private sector to be employed to defend future corporate crimes And, of course, legislators and elected officials who will claim that they have looked out for the public interest. What about the lobbyists who will be deployed by corporations that fear potential prosecution for earlier acts of prior managerial predation For them, this cycle is a gold rush.
Who escapes scot free from the considerable evidence of negligent managerial supervision before the Bust Directors! Protected by the misapplication of the “rule of business judgment,” unobservant directors are largely untouchable. What we have here is another reprise of the Bourbon epitaph once again: learned nothing and forget nothing.
What about the American voter who indulges this charade of protection by regulators The average voter thinks that the rich must be evil and it is time to punish them. What about the stockholders who are the true victims of these penalties H.L. Mencken is right once more: Nobody ever went broke underestimating the intelligence of the American public.