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Bloomberg View: The Case for Punishing Bad Bank Behavior

Bloomberg View: The Case for Punishing Bad Bank Behavior

Photograph by Peter Foley/Bloomberg

Five years after the global economy was sucker-punched by the bankruptcy of Lehman Brothers, has the U.S. done enough to prevent financial companies from breaking the law? If not, what else can it do to deter misconduct—and motivate shareholders to demand changes?

For years the Department of Justice has been reluctant to punish large corporations for fear of driving them out of business. (Remember Arthur Andersen?) The department has instead relied on so-called deferred prosecutions, which usually involve signed promises not to misbehave and the acceptance of on-site monitors to check on compliance.

The U.S. Securities and Exchange Commission’s view has been that hitting public companies with large penalties only hurts shareholders. When companies are willing to settle allegations of wrongdoing, the SEC’s default position has been to let them do so without admitting guilt.

This approach doesn’t protect investors or the economy. Instead, it contributes to market dysfunction by allowing companies to treat litigation as a cost of doing business.

Shareholders, moreover, have little incentive to provide market discipline because they, too, benefit if companies can earn bigger profits by crossing legal lines with impunity. If hefty penalties damped earnings, shareholders would suffer—and might then have reason to hold banks to account.

The good news is that regulators and prosecutors have the tools they need to discourage miscreants, including the securities laws and various other statutes against fraud and conspiracy. Plus there’s the anti-racketeering statute, which allows prosecutors to seek triple penalties if a company keeps violating the same laws.

The sheriffs haven’t overreached with a spate of fraud cases brought in recent weeks; they’re merely late. If, in judiciously applying the law, the government sends a clear message that no bank gets a pass, then the financial system will be stronger—and more trustworthy—for everyone.

To read Ezra Klein on financial regulation and Albert R. Hunt on bipartisanship in the Senate, go to:

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