Prosecuting Those Who 'Caused' the Recession Could Have Unintended Consequences

Portia: Be merciful, take thrice thy money, bid me tear the bond.

Shylock: The pound of flesh which I demand of him is dearly bought, ‘tis mine and I will have it.

- The Merchant of Venice, Act IV, Scene I

Over the past two years we have learned to expect the unexpected. Events that seemed unlikely in the past-the nationalization of the financial system, escalating unemployment, and synchronized market crashes-have become commonplace. While we cannot predict the next economic calamity, we can safely predict a future event. Politicians, in their zeal to punish and settle scores, will overreact, overstep, and deliver long-lasting negative effects.

As the credit bubble expanded, many parties were complicit. Some loan originators perpetuated fraud while Wall Street traders allowed greed to skew their judgment. Lack of oversight and control provided the toxic brew that ignited the current recession. With companies shedding over 4 million jobs, home foreclosures spiking higher, and consumers retrenching, understandable outrage permeates.

Politicians will never allow a crisis to go unexploited. Seeing the opportunity to settle scores and register political points, they grandstand. As Barney Frank seeks to prosecute those involved in the economic downturn, a group that includes not only corrupt CEOs, but also consumers who lied about their incomes, he ignores his own history of preventing the Bush administration from reforming Fannie Mae (FNM) and Freddie Mac (FRE). While Andrew Cuomo seeks to improve his political prospects by crusading against Merrill Lynch's bonus payments, he rejects offers to conduct the probe confidentially. Instead of receiving assistance from Bank of America (BAC) to conclude the probe swiftly and properly, a public drama unfolds that has little benefit to the parties involved. Finally, as Congress attempts to allow bankruptcy judges to alter the terms of mortgage contracts that were voluntarily entered into by homeowners, little concern is paid to the long-term ramifications.

Politicians sense opportunity and are determined to have their pound of flesh. Although the above quote from the Merchant of Venice is widely cited, many forget the outcome of Shylock's demand. By compulsively attempting to exact his bond, Shylock allowed emotion to overwhelm reason. Only after he had committed to revenge was it revealed that he was to suffer. Narrowly examining his bond allowed for the pound of flesh, but not one drop of blood. Unable to extract the flesh without drawing blood, Shylock lost his fortune and was thrown at the mercy of the court.

I would hope our current politicians would realize the consequences of their actions. By narrowly demanding punishment for past actions, we raise the risk of our economy failing. Many of the actions that today are eliciting outrage were common and accepted only months ago. People who bought houses they could not afford and later sold them at large profits were pleased that Frank allowed Fannie Mae to support poor lending practices. New York State was happy to receive the tax revenue from outsized Wall Street bonuses and the booming housing market when it allowed for the funding of pet projects. Bankruptcy judges saw no need to alter contracts when the borrower had much to gain from booming asset values.

Looking backward and punishing participants for actions that were both accepted and encouraged is a dangerous precedent. It increases fear and uncertainty in the economy as few will enter into contracts knowing that terms can be altered at the government's discretion. Credit markets will remain tight and growth will vanish. While reckless pursuit of profits in unregulated, opaque markets caused a great deal of harm, the unintended consequences of self-righteous politicians overstepping could be more lasting. Shylock quickly realized his error of demanding his pound of flesh. I hope Frank, Cuomo, and others have the same epiphany.

Comments

[dcb:]

Washington will find a few symbolic figures (Madoff) to punish, but since they are in the game nothing is really going to happen. They have to do just enough so the public thinks they are doing something and reelects them. At the same time thy aren't going to cut the gravy train that feeds them. To be honest your comments show that you have very little idea of how things work. Washington will do things to actually help out the bankers, but it will be given a story that it is to help out the public. See TALF, a trillion dollar low interest loan to hedge funds and wall street with provisions to ensure they can't take deep losses while tax payers take the real risk. At the same time that wonderful industry refused to participate in the program until restrictions on pay were removed. These are the same people who sold the toxic crap to the world and got us into this mess. Now they can buy it back on the cheap with governmet money and profit once more. You've bought into the playbook hook line and sinker. BY the way, I've go a great bridge for sale. WAKE UP AND SMELL THE ROSES

Mar 12 09:24 AM

[mahony:]

I agree with DCB. Washington will essentially do nothing and the egregious offenders will get slapped. People will be brought before Congress (oh the horror) and chastised for a few days, BUT they will have no other ramifications (financially).

I would really love the chance to screw up, get a huge payout and then be forced to testify in front of Congress. The media makes it sound sooooo terrible, but even calling it a slap on the wrist is overkill. Congress is a joke.

Mar 12 09:36 AM

[Teutonic Kn...:]

Congress and Hollywood are about the same thing. Recall Fred Thompson? Recall that self-styled altruistic female crusader appearing recently with Brad Pitt in Capitol Hill on that pet project of his?

So I don't really know which option is better. Would they all go to Hollywood, or stay on running the country?


On Mar 12 09:36 AM mahony wrote:

> I agree with DCB. Washington will essentially do nothing and the
> egregious offenders will get slapped. People will be brought before
> Congress (oh the horror) and chastised for a few days, BUT they will
> have no other ramifications (financially).
>
> I would really love the chance to screw up, get a huge payout and
> then be forced to testify in front of Congress. The media makes it
> sound sooooo terrible, but even calling it a slap on the wrist is
> overkill. Congress is a joke.

Mar 12 10:13 AM

[User 283977:]

Part of the fabric holding countries together are it's laws. If laws were broken, than the legal system must prevail. Smoke screen generation is clearly under way. You can even see it in action on SA. However, this is to big to hide because there are huge perks for the people that find and reveal the truth. There will be sacrificial offerings. People will either take one for the team, or ….

Of course there are consequences associated with learning what happened, and what trusted institutions were involved, but if this is allowed to be sweep under the rug, the institutions responsible will continue to play by the same rules. If a countries financial system can essentially be gamed and the people allow that, then the people deserve what they get. We are either a country of law, or we are a country of lawlessness.

As in the sciences, the process starts with the discovery of key questions. For example, the federal regulatory agencies should have caught this before it snowballed. Why didn't they? Look at changes in regulations from Congress. Who were the primary pushers of those changes, and who funds those members of Congress? What qualifies former CIA officials to be board members of a huge financial institution such as Citi? Who is Prince Alwaleed and who's interests does he represent, and why are those interests apparently being treated in preference to other investors? Why, in a supposedly democratic country are federally funded programs like TARP not completely transparent?? How are those funds being used? Why is the TARP program being run like a secret "Black" project? Coincidence that a tarp is a covering?

Sean's inference of "unintended consequences raises what I think is the fundamental question: Why should people be apprehensive of finding out what happened? Is it in the best interests of the people of the United States NOT to know what happened, and who did it?

What do you guys think?? Better to not know, or "hang um".

Mar 12 10:58 AM

[BOBO101:]

So much for moral hazard.

How long has it been since we punished the two (only?) bad players, Enron's and World Coms CEOs. They got jail time. Didnt they?

Mar 12 11:35 AM

[sa44ron:]

Prosecuting Those Who 'Caused' the Recession? Well, let's start at the top: the FED(eral Reserve). Who will mete out the punishment? The System doesn't punish it's own, unless they want to get rid of someone. There are the voters, and the American public are captive to the System. That leaves the foreign governments. After Bretton Woods was repealed, OPEC was formed so the oil producing countries could combat US dollar inflation.

The next step along this line is a new international exchange system based on a basket of currencies and commodities. For instance, the basket would have six equal parts: three currencies (US dollar, Japanese yen, Swiss franc) and three commodites (gold, oil, rice). Exchange would be done in any of these six parts. The value of the transaction would be based on the basket. The basket needs no name as the basket itself is not traded. No government could print more baskets.

Lets face it, when it comes to money these days, no government trusts another government. The basket establishes accountability. On accountability, trust can be built.

In God We Trust. All others pay cash. Just not US dollars.

Mar 12 11:45 AM

[Tobin Edwards:]

Sean,

Spoken like a true Wall Street insider. I could take your hypothesis apart piece by piece but frankly I don't have time. I'm struggling to manage my portfolio during this mess. I say hang them from the yard arm. We'll recover.

BTW watching John Stewart take Jim Cramer apart was priceless. But then I've never believed a thing Cramer said anyway. He is the Rush Limbaugh of CNBC.

Mar 12 12:41 PM

[searcher:]

The usual hobby horses have been trotted out and are being severely whipped while still in the gate. It is egregious to deny the necessary reversion to the mean as respects recent past excesses abusing even minimal adherence to ethical pratices. That reasoned justice will be the stalking horse for exploitation by any interest with the wit to realize an advatnage is a given for any situation. The motives are irrelevant as the road to hell is paved with even the noblest of intentions. Find the facts, follow the facts, render judgement appropriate to the facts; then move on.

Mar 12 12:52 PM

[disgusted73...:]

We are a nation of thieves who live in the same house.

That sounds healthy, doesn't it.

That is, until the thieves see we have no money or goods or services left to steal, at which point, they will move on to another place, and leave all the idiots who let this happen here to bicker and yell at each other about why we all let the thieves take our money and our lives.

Mar 12 01:22 PM

[sether:]

Your article seems to do what you are arguing against, by attempting to prosecute in the court of public opinion those political figures with whom you disagree.
Please stop with the Barney Frank disinformation. He is not responsible for this mess in any significant way. He assumed the Financial Services Committee Chairmanship in January 2007. In 2004, this is what Frank said regarding the BUSH administration's attempts to reform Fannie/Freddy:
“Fannie Mae and Freddie Mac would suffer financially under a Bush administration requirement that they channel more mortgage financing to people with low incomes, said the senior Democrat on a congressional panel that sets regulations for the companies.

“The new rule compels the companies to put 57 percent of their mortgage financing by 2008 toward homes for people with incomes no greater than area median income. Fannie Mae and Freddie, the two largest U.S. mortgage finance companies, must currently meet a 50 percent threshold.

this from a Bloomberg article, June 17, 2004: "Fannie, Freddie to Suffer Under New Rules, Frank Says” by Jim Tyson.

Reforming Fannie and Freddy was part of the Bush Admin's push for an 'ownership society'. Privatizing Social Security was another push to that end...

You are a shill and an evil clown.

Mar 12 05:59 PM

[PainfullyAware:]

Beware The Start Of The Witch Hunt.

Yes, Lets Review And Prosecute.

Unfortunately, those with influence and power are not easily implicated; the underlings are sacrificed.

Lets Begin With K-Street In DC - Jerry Springer Would Be Put Out Of Business With The Theater That Would Be Generated.

Alas, Bloggers would be the only audience. The Media is only able to read what comes up on the teleprompter.

Mar 12 07:19 PM

[kelm:]

Politicians will grandstand but that is about all they do. In the end there are a few ceremonial hangings but nothing that cuts to the core. That has been rampant in this nation for years and it has to stop. We are living with the unintended consequences of the past inability to deal with these issues and we failed to deal with them decisively due to exactly the argument that you make.

If the CEOs and senior executives of the major banks, insurance companies, and investment houses were captains of naval vessels and failed to analyze and anticipate the risk they were operating under they would have been tried and expelled from the service if found negligent.

Serious structural damage has been inflicted on the US economy and yet we take no steps to hold them accountable other than requiring them to sit through a few hours of listening to Barney Frank talk. Ditto for the regulators who apparently had the information that certain crimes were being committed but dd not have the resolve or potentially the intelligence to understand what they were seeing.

Demand more from your society - don't make excuses for accepting failures.

Mar 13 11:02 AM

[henarl:]

Selective prosecution and punishment is, unfortunately, what will prevail. Who will punish the politicians and bureaucrats (or their friends and contributors)?

Mar 13 03:02 PM

[devassocx:]

But who is going to prosecute Frank and crew for
their part in being the enablers of this mess?

I suspect no one...and that's the real shame!

Mar 13 11:31 PM

[po folks:]

All good comments to this article (which also raises a lot of serious questions).

Somehow we must clean up a dysfunctional economic system that perpetrated fraud along every tier of a long value chain, while being aided by numerous self-serving cheats in high public office.

The justice system now has a chance to do this thoroughly and fairly. If it blows the opportunity then it stands with the crooks.

I agree with the author that the free market is at risk at every step of such a reckoning. However, "Free Market" does not mean, "Free-For-All". You have to hold accountable those who were responsible to prevent this from happening.

Mar 16 01:16 PM