A question I am asked as frequently as any other is: 'Why didn’t anyone go to jail for the financial crisis?' There was huge suffering, sufficient misbehavior that the largest banks had to pay well over $100 billion in fines, and in the past, people had gone to jail for financial shenanigans during the Depression and the S&L crisis. People are usually indignant as they ask the question.
I respond by saying that in line with American tradition, if not current practice, the White House stayed out of law enforcement, so I have no knowledge of possible criminal prosecutions that could have been brought and cannot evaluate or defend the decisions that were made. I go on to note that lack of good judgment, incompetence and even stupidity are not crimes. Also, the kind of enterprise looting that was common with the S&L crisis does not seem to have been common in 2008.
I also quote former Treasury Secretary Tim Geithner’s observation that, to some extent, one has to choose between Old Testament vengeance and the restoration of confidence. I remind people that the occupying forces in Germany and Japan found it much less practical to remove all bad actors from leadership positions than they originally hoped and supposed.
All of this, plus a list of those who were fired during the crisis, rarely persuades my interlocutors, and I do not think they are wrong in their unease. It has long seemed to me that we need better approaches to corporate accountability than large fines paid by shareholders of record, years after bad acts were committed.
This all came to mind when the terms of the Federal Reserve’s punishment of Wells Fargo was announced last Friday. Wells will not be permitted to grow its assets until it is deemed under control, and four of its directors will be leaving the board. My question: Why aren’t the directors who are leaving being named and asked to resign effective immediately with an element of humiliation?
It is pretty clear that the Wells Fargo board has manifestly failed in its duties of supervision. A trader or credit officer as extravagantly malfeasant would not be granted a dignified exit. I find it hard to understand why regulators are so reluctant to foist public accountability on the individuals in responsible leadership positions when companies do the wrong thing.
Government apart, institutional investors have taken to proclaiming themselves to be major supporters of corporations behaving responsibly and ethically. Why shouldn’t the avatars of responsible capitalism such as BlackRock insist on public resignations of board members when firms have established a track record of unethical behavior on their watch?
Yes, my proposal will make it harder to recruit board members. This is a feature, not a bug. If board members worry about reputational risk, this will deter dilettantes interested in the networking and the paycheck. It will be a source of pressure on management to minimize risks and on boards, and to maintain independent relationships with regulators.
There are compelling reasons for due process before anyone goes to jail, even if it undermines deterrence. There is no similar justification for due process before being fired, publicly, for being a failed fiduciary. The Fed and other regulatory agencies should change their procedures.
Lawrence Summers is Charles W. Eliot University Professor and Director of the Mossavar-Rahmani Center for Business and Government, Harvard University. He is a former US Treasury Secretary.
This article was first published on Professor Summers' blog.