Richard Epstein has a terrific piece on the various investigations and prosecutions of J.P. Morgan here. “The Department of Justice,” he writes, “ is bringing to heel a bank that came into two major mistakes. First, the bank did business with the federal government. Second, it was regulated by it.” That just about sums it up. The piece is a wonderful expose of the sordid, extortionate practices that have come to characterize “law enforcement” in the financial sector.
You begin to wonder whether there can still be a legal practice called “white collar defense.” Given the hammers the government wields over the targeted entities, there is no viable defense; it’s more like begging for mercy, which is best conducted by people who are good at waving white flags and have personal friends at the various government agencies. This may help to explain the fantastic sums that are now flowing in the direction of federal agencies, Fannie, and Freddie. The targeted companies have to settle at almost any price.
What bargaining leverage do they have? I can think of only two measly chips. One, investigations and prosecutions are typically brought by competing government agencies. They collude, but they also compete for the right to have the company’s hide on their own wall, not someone else’s. For example Attorney General Eric Holder is in the process of negotiating a $13 billion (!) settlement with JPM over alleged mortgage abuses. If he lets the deal fall through, he is out of the picture and the prize will go to someone else. So the bank may have a bit of regulatory leverage.
Two, the government’s ultimate weapon, a criminal indictment (which would all by itself threaten the bank’s federal charter), may not be all that credible. As Richard notes, the feds used that weapon once against Arthur Andersen, way back in 2001—and it put the company under. It’s hard to believe they would do that again. Not against another accounting firm: the demise of Arthur Anderson reduced the number of big firms from five to four; mow down another, and the antitrust guys would go ape. And not again JPM and other big banks. In the certain event of another financial crisis, the feds needs the big banks around to take over the assets of smaller, failing institutions. Financial repression can’t work if there’s no one around who can be repressed.
In that light, it’s a bit surprising that the DoJ-JPM deal appears to be hung up over the Department’s unwillingness to grant immunity against future criminal charges: why insist on keeping a trump that can’t be played? One plausible answer is that Mr. Holder wishes to keep the option of monetizing the threat at some future time. It’s a good game; keep it going. That, unfortunately, is the benign interpretation and scenario. The more menacing scenario is that the criminal indictment card is also held by U.S. Attorneys in New York, Sacramento, and elsewhere. (Criminal prosecutions against JPM are pending in the named jurisdictions.)
The late Mancur Olson famously distinguished between “stationary bandits” and “roving bandits.” “Stationary” government bandits seek to maximize their returns over time, and will therefore refrain from destroying the system they exploit. “Roving” bandits have no such inhibition: they come, loot, and go.
It stands to reason that regulatory agencies like the SEC, the OCC, or the Fed behave more like stationary bandits. But that’s not true of U.S. Attorneys, state AGs, and maybe DoJ: their incentive is to loot and to leverage the returns (for higher office, or lucrative white collar “defense” jobs).
The differences between stationary banditry and democratic government may not be all that great. The difference between stationary and roving banditry is the difference between government and anarchy. We now have something Mancur Olson never expected to see: roving bandits with government badges. Wow.