Tuesday, June 23, 2009
Huffington Post notes:
A state judge on Thursday ordered former HealthSouth CEO Richard Scrushy to pay nearly $2.9 billion to shareholders who sued over a massive accounting fraud that nearly sent the rehabilitation chain into bankruptcy.
The judgment is very good for America.
Because the current incentive for high-level corporate people is to commit fraud. Even if they are caught and go to jail, they’ll be rich when they get out.
Hitting the crooks in the wallet is the only thing which will motivate people not to rip off their shareholders, the taxpayers and the American treasury.
As Paul Volcker says, the incentive systems at financial firms are broken.
Hitting wrongdoers with big fines will help fix them.
As William K. Black – the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri said:
Failing bankers ha[ve] perverse incentives to “live large” and cause larger losses to the FDIC and taxpayers.
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And Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the reasons for financial meltdowns:
Financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer [co-author and himself a leading expert on economic growth] said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
If enough people like the HealthSouth CEO are hit with multi-billion dollar fines for fraud, future losses will not be somebody else’s problems, but their own.
That would make the game of financial fraud a lot less profitable, and so undermine much of the motivation of corporate big-wigs to commit fraud. And – given that Black says that massive fraud is what caused the economic crisis – that in turn would save the taxpayers from having to fund many billions in bailouts . . .
This article was posted: Tuesday, June 23, 2009 at 3:26 am