The Department Of Justice Is On Line Two

I don’t generally overreact to news (from the NYT this morning, on the AIG-Goldman connection that runs through Edward Liddy’s stock ownership), but this has gone far enough.Have we completely lost of sense of what is and is not a conflict of interest?  Have we really built a system in which greed fully overshadows responsibility?  Is it not time for a complete rethink of what constitutes acceptable executive behavior?One of our country’s leading corporate attorneys made a telling point to me on Wednesday night, “the only way to control executive behavior is to criminalize it,” i.e., civil penalties do not change behavior – the prospect of jail time has to be on the table.  His broader point was that antitrust action can make a difference in today’s world, but only if this includes potential criminal charges.

The same NYT article reports the following official statement from AIG.

“A.I.G. is a large institution that engages in standard commercial activity with companies all over the world,” Ms. Pretto said. “These activities are handled in the normal, day-to-day course of business and rarely, if ever, rise to the level of the C.E.O.”

I have three specific comments on this.

1) Do not insult our intelligence.  Either Mr Liddy is running the company or he is not.  Of couse a CEO doesn’t handle every detail, but he/she sets the tone, the compensation, and – have we forgotten? – is responsible for what happens.

2) According to the NYT report, Mr Liddy has an apparent conflict of interest.  Please answer these question as simply and directly as possible, because otherwise they will be repeated indefinitely.  When did Mr Liddy disclose this and to whom at the Federal Reserve Bank of New York (or to which other responsible government officials)?  What did Hank Paulson, then Secretary of the Treasury and former CEO of Goldman Sachs, know and when did he know it?

3) If the Obama Administration thinks this is a storm in a tea cup, think again (I’m sure Valerie Jarrett gets this, but someone please check).  Straws may or may not break camel’s backs, but simple symbolic issues – that millions of people can understand and relate to – can bring major political damage in the midst of a broader, more complex economic fiasco.

Let me be very clear on my position vis-a-vis AIG-Goldman and the broader Washington-Wall Street Corridor.  I’m not saying that anyone has broken any laws, but rather that laws need to be changed.  I’m not even saying that there have been transgressions against the prevailing code of ethics for executives and politicians – although surely we agree that this code needs to be dragged, kicking and screaming, into the 21st century.

I’m just saying that we have a problem – ultimately, with the belief system that underpins how big finance behaves – and we need to fix it.

Originally published at the Baseline Scenario and reproduced here with the author’s permission.

One Response to "The Department Of Justice Is On Line Two"

  1. Ricardo Smith-Keynes   April 18, 2009 at 10:01 am

    Professor Johnson,I am sympathetic to your argument (and share your outrage), but would highlight a couple of caveats:First, if financial executives are indeed motivated by greed why wouldn’t (much) higher civil penalties deter defalcation and their reckless and irresponsible behaviour?Second, the burden of proof for civil penalties is a “balance of probabilities”. For a successful criminal prosecution, however, it is the far more demanding “beyond reasonable doubt” test. Moreover, criminal prosecutions require a mens rea (guilty mind). Sadly, I suspect that stupidity and greed—the two factors that drove many a financial sector sociopath—do not constitute a guilty mind.The point here is that we could raise criminal penalties, but reduce the expected negative utility of the penalty by reducing the probability of a successful prosecution.