From the November 01, 2012 issue of Futures Magazine • Subscribe!

Rogue CEOs and absent regulators: Is there a pattern?

Types of failures

Regulatory failures broadly fall into three categories: Rogue traders, systemic disruptions and outright acts of thievery.

Rogues often are traders who just got lost in the game and took on more risk than they were authorized to — sometimes to earn a bonus, other times to feed their egos and often because they believe they have the tacit approval of management, usually with justification (after all, Jon Corzine actually was management). The victims usually are the company and its creditors.

When other market participants or the market itself are the victims, then it’s a systemic failure — and most of those have happened because someone ran amok in the multi-trillion-dollar market for unregulated derivatives. Here, even industry booster John Damgard acknowledges that some degree of regulatory change was needed, but he doesn’t go as far as Alan Greenspan did when he told the House Committee on Oversight and Government Reform, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

Some systemic disruptions are intentional — like those that happen when someone tries to corner a market — but most of them aren’t. Neither Long Term Capital Management nor AIG, for example, wanted to disrupt markets — although William Black argues that bonus-blind individuals across the real estate lending apparatus knowingly passed bad loans into the system. This, he long has argued, is organized fraud on a massive scale and deserves to be prosecuted as such.

“In the Savings and Loans crisis, which was 1/70th the size of this crisis, our agency made [more than] 10,000 criminal referrals that resulted in felony convictions for more than 1,000 executives,” says former prosecutor Black. “In the housing crisis, the number of referrals is zero.”

He lauds the Justice Department for suing J.P. Morgan Securities for misconduct in the packaging and sale of mortgage securities during the housing boom, but that suit is civil — not criminal. The recent wave of banking scandals — from housing to Libor — aren’t just inadvertent disruptions, he says. They’re criminal acts. 

Black argues that the criminal justice system has been on the same slippery moral slope that ensnared Charles Ponzi and Nick Leeson. Neither set out to break the law. Ponzi started out with a half-baked plan to arbitrage postage stamps issued in different currencies, while Leeson thought he could trade a colleague out of an error. After a while, they lost sight of the boundary between right and wrong.

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