Financial regulators: Policemen or tax collectors?

Ka-ching

The press reports almost daily about commercial and financial firms that have sustained massive losses from trading (UBS, JP Morgan etc.), negligence (BP) or alleged chicanery (Barclays). Soon thereafter, we learn that the Government has exacted huge fines from these companies as well. In at least one case (BP), a multi-billion dollar penalty is expected even after the firm spent tens of billions of dollars repairing its mess. It seems that blood in the water does indeed attract sharks.

They call it a "civil monetary penalty" or a "fine," but those terms seem hollow when a financial firm itself is whacked for millions of dollars by regulators after suffering huge losses from bad bets or cowboy traders. "Piling on" seems a better description. 

True, the firms made mistakes, perhaps for all the wrong reasons (e.g., when has a successful bettor been called a "rogue trader"?). And, sure, supervision and standards usually need improvement. But adding another layer of losses in the name of "enforcement" is an odd way to express disapproval.

Who does this hurt? Management does not pay. The burden for both the original losses and the subsequent fines falls upon the shareholders whose investment declines and upon the consumers who suffer higher fees for the firms' services - both innocent bystanders.

Let's face it. Regulators in these circumstances are acting like tax collectors. They brag about being Government profit centers, assessing some multiple of their budgets in fines each year, with the excess going into the U.S. Treasury just like our official tax payments.

Tax reform is on everyone's lips these days. As long as the Treasury can benefit from the misery of financial firms, while responsible management is left untouched, this is an area where genuine "tax reform" is sorely needed.

 

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