The Shadow Drama of “Hold Up”

Todays story in the Wall Street Journal (Banks’Legal Bills Linked To Crisis Linger:Morgan Stanley, Bank of America Disclose Details of Continuing Regulatory and Legal Challenges) reported a settlement reached by Morgan Stanley with the Government of some $250 million. The settlement continues the gold mine of penalties exacted by the government from unwitting shareholders. Unwitting, because shareholders should have been protected to some extent by the Boards of the fined companies, had Directors truly acted in the interest of shareholders. Other victims of this government hold up strategy have included JP Morgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS) as well as many lesser lights in the mortgage debacle.

The strategy of reaching a settlement has paid big political dividends to the Obama regime seeking to show the public it is looking out for the publics interest (at least the 99%). To the extent that these awards reduce the deficit, one might argue that some merit attaches to the strategy. But, does it do anything about the future corporate behavior of the firms that are fined Probably not because the root issue is poor corporate governance.

As discussed extensively in our book Disorganized Crimes, shareholders pay the bill for these defalcations. In a bettered governed world, they would be protected by their Directors, at least partially. Largely, they are not.

Management has huge incentives to settle these issues outside the courthouse. Legal expenses pile up and testimony during the trial might further soil the corporate reputations of management. Furthermore, a constant attack by the Government hunting for corporate scalps takes management away from its primary duty to maximize the earnings of the corporation with due regard for safety. The Government knows that and can pound on the alleged malefactors while giving the public the sense that their interests are protected. It is a shadow drama. The wronged are the victims while the perpetrators get on with their business. True corporate governance reform goes by the wayside in the Governments take no prisoners campaign. Were it not so.

A Pox on Both Your Houses

What is the ultimate outcome of the year long pillorying of JP Morgan by various elements of the Justice Department as well as various States Attorney Generals The shareholders lost considerable equity in JPM that will be dispensed over a number of years as fines, restitution and community rebuilding efforts. Perhaps, more importantly, a long standing critic of Federal regulatory policies in the finance sector, Jamie Dimon, Chairman of JPM, has been appropriately chastised. Appropriately, is a term worthy of a readers thoughtfulness! If the object lesson that the Department of Justice wished to teach was, dont tread on me, Mr. Dimon certainly got the message. Undoubtedly, he and other leaders of financial firms in the US will draw a different lesson: dont buy besmirched goods from a government agency. Continue reading