Recent academic papers begin the formal work of proving that CEOs and giant corporations face a completely different legal system than the rest of us, one in which their vast resources are used to insure that they can safely ignore laws and rules applicable to small fry. One study looked at the influence of corporate lobbying on fraud detection. Corporate Lobbying And Fraud Detection, 46 Journal of Financial and Quantitative Analysis 1865 by Frank Yu of Barclays Global Investors and Xiaoyun Yu of Indiana University available here. From the abstract:
We find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.
This quantifies earlier anecdotal data. For example, look at the collapse of Lincoln Savings and Loan. Five senators intervened to stop an investigation, and the business collapsed two years later at a cost of at least $3 billion. The delay sought by the Keating Five increased the losses, particularly to small savers who bought Lincoln Certificates of Deposit. Yu and Yu show that this hideous perversion never stopped, and not only includes direct campaign contributions but also lobbying. They show that firms increase their lobbying expenses after they commit fraud. During the time they are committing fraud, executives of lobbying firms sell their stock about four times more than firms that aren’t lobbying. Sarah Fulmer and April Knill of Florida State build on that study in their recent paper Political Contributions and the Severity of Government Enforcement, available here, with abstract. Fulmer and Knill examine data on PAC contributions by corporations and CEOs and SEC data on enforcement to show that
…accused executives whose firms have contributed to political campaigns via a PAC are banned as an officer for three fewer years, serve probation for five fewer years, prison for six fewer years and are 75% less likely to be given both prison time and an officer ban (the most severe form of criminal and civil penalties)…
Fulmer and Knill point to Judge Rakoff’s refusal to rubber-stamp the SEC settlement with Citigroup over cheating its investors in a late-stage RMBS deal. They also mention an earlier repulsive settlement between the SEC and Citigroup CFO Gary Crittenden. On an analysts conference call, Crittenden said Citi had reduced its subprime exposure by 45% to $13 billion, not mentioning the other $40 billion in super-senior tranches. Crittenden settled for a meaningless $100K and there was no discussion of the fraud on investors. The SEC Inspector General began an investigation to determine whether, as alleged by Senator Charles Grassley, Robert Khuzami, the SEC Chief of Enforcement, had a secret meeting with Crittenden’s lawyer and good friend of Khuzami, and subsequently told his staff to lighten up. The IG eventually cleared Khuzami. The reporter, Allison Frankel, said the IG report shows the cozy club approach to settlements at the SEC. Friends call friends, there are discussions about whether Crittenden would have to resign from his Church positions and the impact of a fraud settlement on Citi. Marcy Wheeler sees that club in action again in the efforts to cover up the Standard Chartered fraud.
First, you hire Sullivan and Cromwell and act contrite. Then, you pay a consultant to conduct a review and claim the violations involved just $14 million in transactions as opposed to $250 billion shown in your bank records. … Then you bury all the embarrassing details showing willful flouting of the rules, so the proles don’t learn how craven banks really are.
Then there is the latest whitewash of Goldman Sachs. The Department of Justice won’t prosecute for the allegations made in the report of the Senate Permanent Subcommittee on Investigations, and the SEC won’t file charges over its subprime mortgage portfolio. One channel for creating these relationships is the personal connections created as people rise through the ranks of government and move into white collar defense in the private sector. Political contributions and lobbying are another channel. Everyone knows that your rise to wealth is dependent on following the rules of connection, and eventually you get to the point where you can do the contributing and lobbying, and use those connections for your personal benefit and the benefit of your clients, which enables you to get even richer. That has now culminated in the capture of the Department of Justice by financial interests. Attorney General Eric Holder is a rich guy from Covington and Burling. He bundled contributions for Obama and served as a co-chair of the campaign. Three other top Justice Department officials played major roles in fundraising and came from white-collar defense firms. It’s worth noting that the right wing is all over these connections. No links from me, but google “holder west perrelli mason” and see for yourself. The prosecutors, the rich, the politicians: all buddies in the rarefied atmosphere of wealth and power. How could such great guys possibly be a lying cheat? And if there is a slip-up, they cover up.