January 15, 2013
Send a Banker to Jail

Excellent piece at The Atlantic on the opacity of bank reporting and the impact it’s having on investment in banks in general because experienced and knowledgeable traders cannot understand the risks associated with the banks’ financial positions. They appear to be so highly leveraged that they could easily destroy the entire economy if things fail to go their way; nothing, it seems, was learned from the crash they so recently caused. And of course why would it be? We bailed them out last time they destroyed it.

In the decades following the 1929 crash, banks were understandable. That’s not because they were financially simple—that era had its own versions of derivatives and special-purpose entities—but because the banks’ disclosures were more straightforward and clear. That clarity sprang from the fear of consequences. The law, as Oliver Wendell Holmes Jr. said, is a prediction of what a court will do. And the broadly scoped laws of that time gave courts wide latitude.

Going to jail for financial fraud was a real risk back then, and bank executives worried that their reputations would be destroyed if a judge criticized what they had done. Richard Whitney, a broker who had been the president of the New York Stock Exchange, was sent to Sing Sing prison in 1938 for embezzlement. “Sunshine Charlie” Mitchell, the president of National City Bank, the predecessor to Citibank, was indicted for tax evasion after the 1929 crash and was also the first of many bankers to testify before the famous Senate Pecora Committee in 1933. The Pecora investigation galvanized public opinion, and helped usher in the landmark banking and securities laws of 1933 and 1934. The scrutiny and continuing threat of prosecution convinced many bank executives that they should keep their business simple and transparent, or worry about the consequences if they did not.


Posted by Chuck Dupree at January 15, 2013 07:00 PM
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Ah. But things are different now.

Posted by: Sean O on January 16, 2013 6:44 PM
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