I don’t know what all these banks did to deserve all this but once again, when you are fining the bank, you are fining the shareholders of the bank who had nothing to with what management did. So if management did something egregious or criminal go after the people that did it and stop taking the shareholder’s wealth.
-- Howard Ward, chief investment officer at Gamco Investors
Since I started this column, I have on occasion poked holes in the weak analysis, bad theory and just plain dumb ideas that bounce around Wall Street all too regularly. Today, I want to highlight a surprisingly common belief that simply fails to withstand close scrutiny. Indeed, it is so rife with sloppy, ill-considered thinking that it cried out for a response.
The quote above is fairly typical of the genre. Not to pick on Howard Ward or anyone else, but there is this entire school of thought that treats shareholders as passive victims of reckless prosecutors. There has been some truly awful spin made in response to the recent criminal prosecutions of large banks, but this one takes the cake.
Woe to the poor shareholders who are actually held accountable for the actions of a company’s management.
Let’s analyze that line of thinking, frequently put forth by opponents of fines and/or prosecutions of companies themselves for criminal matters. (The Ward quote was made on the "Bloomberg Surveillance" TV show this morning.)
The disingenuous silliness of “I don’t know what all these banks did to deserve all this” is beyond absurd. As a brief reminder, the banks have admitted to laundering money for terrorists and drug lords; engaging in bid-rigging fraud against local governments; manipulating the electricity market; manipulating the $300 trillion Libor rate, fixing Treasury auctions, and manipulating price of gold, as well as aluminum and copper.
And that is just recently.
If you haven’t any idea why banks are being prosecuted for criminal misconduct, perhaps it might be best to avoid discussing this on television?
But lets move on to the dishonest thesis of “punishing the shareholders” for the acts of management. Who else are you going to fine?
These are not innocent bystanders, caught in the crossfire between two rival gangs. They are the people who actually elected this management team in the first place. They are also the only ones with the power to fire these people as well. To suggest that they are merely bystanders of a drive-by shooting is absurd. Unless we want corporate shareholders to elect more dangerous executives. If that is your position, than by all means, never fine or punish them.
As to the complaint of “taking the shareholder’s wealth,” that’s a more nuanced. Ownership is a two-sided proposition, with potential gains and potential losses. What would happen if shareholders were never held responsible for their actions when appointing board members of a company who hire future felons?
That creates a legal entity where no one has any responsibility for any corporate actions -- a true “Get Out of Jail Free” card.
Instead, we allow Investors to be personally shielded from any liability for the actions of the companies they own. In return, they get potential upside as the company grows and its stock price rises. They also get the downside when companies mess up in a big way.
What about the management, shouldn’t we punish them as well?
By all means, pursue criminal charges against individuals: “If management did something egregious or criminal go after the people that did it and stop.” But that is not mutually exclusive with fines and prosecutions.
The old expression is, “if you want less of something, tax it more.” It seems the entire country wants less irresponsible corporate behavior, especially from the big banks. Their recklessness nearly pushed the global economy into the abyss. They are finally healthy enough to be held responsible for their illegal actions, I say, let them pay the fines and move on.
To contact the author of this article: Barry Ritholtz at firstname.lastname@example.org.
To contact the editor responsible for this article: Tobin Harshaw at email@example.com.