I have spent lots of years working in delinquency prevention. I can assure you that punishment only works if there is a high likelihood that the wrong doer will get caught and somebody will want to do something severe about it.

Other big factors include peer and community influence and healthy available leadership.

All of this is fairly well known about delinquency. I wonder how much it applies to politicians and bankers. How much of those strategies could ever happen in that environment?

Bob Spencer

"Have we completely lost of sense of what is and is not a conflict of interest? Have we really built a system in which greed fully overshadows responsibility?"

Well yes. Where've you been man? Were you around for the Iraq war/Halliburton/Dick Cheney show? ;)

Please--AIG performed on a contract. It was a big contract, but it was still a contract, and if they'd broken it they would have been sued for the money and lost.

The root problem is treating corporations as people. This has allowed them to claim "freedom of speech" rights as a cover for wielding political influence as well as fostering false claims.

Poor enforcement has also led to the situation where a firm is found to be in violation of some law or regulation and pays a fine, without admitting "guilt". Companies don't commit crimes, people do. The willingness to settle wrongdoing without individuals being punished needs to stop.

If no specific individual can be found guilty than the blame goes to the CEO. That's the principle established by Sarbanes-Oxley and it should apply to all activity not just fudging financial statements.

When a firm gets by with a fine the only ones who pay are the stockholders, and given the realities of modern corporate governance they are the ones with the least control over how "their" firm is run.

We need to abolish corporate personhood and perpetrator-less crimes.

Mr. Johnson, I greatly enjoyed your recent article in the Atlantic. Your ability to use first hand experience to compare recent financial crises was a true breath of fresh air.

It made me seriously question Stiglitz' assessment of the IMF as a home for third rate minds from first rate institutions.

This piece is another matter. The NYT article to which you linked ends with

"Officials at the Fed, which initiated the bailout of A.I.G. last September, have said they were not happy about having to pour public resources into private sector companies, but felt that they had to do so to avoid a chain of losses at financial institutions all over the world."

In other words they didn't want to see another Lehman - which almost everyone agrees was a complete disaster and nearly brought down the entire system. You disagree? You think A.I.G. should have been allowed to fail? That would put you in the camp of the most conservative of free market advocates, those who think government should stand aside and let the whole rotten house of cards fall to the ground so that a new, better, house can be built more quickly. If that's true I'd be very, very surprised.

Also, your concluding paragraphs SEEM to say that no executives have broken laws in their greedy pursuit of enormous personal profit. It's the laws which allow such pursuit which you want changed. There's something both disgusting and utopian about such a position - disgusting because our democratic government has been responsible for such a legal system after so many, many decades of criticism, utopian to think it can be changed by the same (or any) form of government.

This is a preliminary critique. Thank you for such a thought provoking piece. Please keep up the good work...and I hope you will participate personally. Authors sit above the fold because they are presumed to be more talented, more experienced, and better informed than commentators like me. If you don't give us feedback we all lose.

What we've found over the past 30-odd years is that so-called transparency just doesn't cut it. I still remember the days when the rules required people taking jobs with potential conflict-of-interest problems to either divest or stash all their holdings in a blind trust. (Of course, those were also the days when people took government jobs without necessarily assuming that they would thereby become rich, or even richer than they were.)

I think we need to get rid of disclosure rules and institute a divest-everything rule. Add a loophole to the tax law so that proceeds rolled over into a blind trust managed by some outside party aren't subject to capital gains taxes. Hand the money back at the end of government service.

Ironically, if Liddy did break the law with his self-dealing (and who thinks that a payout of $13 billion without negotiation by an effectively-insolvent company doesn't rise to the CEO level) he didn't do it because he had $3 mil in stock he wanted to preserve. He was holding that stock because he believed that Goldman was indispensable, and his decision flowed from that belief.

silly simon,
laws are for little people, didn't you get the memo?

get popped with a bag of weed, go to jail.
crash the economy and profit from your conflicts of interest? no big deal.

yay america. go team. usa usa usa

A bit off topic but ---

A spokeswoman for A.I.G., Christina Pretto, dismissed any suggestion that Mr. Liddy’s financial ties to Goldman might have shaped his actions at A.I.G.

“Discussions regarding [how to close out the contracts of A.I.G.’s counterparties in derivatives] were handled exclusively by the Federal Reserve Bank of New York,” Ms. Pretto said.

And who was president of the Federal Reserve Bank of New York at the time? Why, none other than our own Timmy Geithner.

Swing and a miss, Professor.

Let us recap the sequence of events:

AIG (headed by CEO Robert Willumstad) goes to Fed and says that is has a big liquidity problem. Because of a ratings downgrade and a bunch of stupidity in its AIGFP sub, it has to post something like $50B in cash collateral on its credit default swap book in the next few days. If it fails to meet those collateral calls and has to file BK, all of the holders of all those swaps (nominal value: $2 Trillion?) would have to write down the value of the underlying instruments to market value. (If the swap is no good, you have to look to the value of the underlying assets, which were CDOs.) That would be a giant write down across lots of institutions all at once.

The Fed decides that it is better for the US economy if AIG meets its obligations, so they loan AIG the money. To make the transaction exquisitely painful (which is utterly appropriate), they extract punitive terms: they shoot the CEO, they take 80% of the equity, and they charge a ton for the loan.

The Fed then puts into place their hand-picked CEO, Ed Liddy, formerly of Allstate and the Goldman board. His mission is to execute the strategy already devised: see that AIG meets its obligations and see that it repays the Fed. Clearly, the strategy was never "divide AIG's creditors into favored and disfavored classes based on how Barney Frank or Elijah Cummings feel about them." It was "pay them all", so the credit markets do not have to apply some sort of discount factor to AIG paper that would lead to large, widespread writedowns.

So that's what they did, and that is what Liddy has been doing, all for the princely sum of $1.00.

So where's the conflict? The job he was hired to do was to pay back the creditors. Goldman was a big one, but so what? Liddy didn't decide to pay Goldman, or for that matter, he didn't decide to treat Goldman any different than anyone else. He executed the strategy that the Fed had decided upon BEFORE THEY HIRED HIM.

You seriously advocate that a guy who took the job because his government asked him to and is doing it for a buck ought to be exposed to criminal liability because why, exactly?

You can reasonably dispute the initial decision to loan AIG the money. In the context of the chaos then reigning in the credit markets, I think it was the right call, but that's a fair issue.

You can with even greater merit I think, dispute whether the Fed should have let Lehman die. That decision probably made things a lot worse. Saving Lehman on punitive terms probably would have saved us all a lot of pain. But so be it.

But Liddy as a criminal? You are either stupid or not paying attention.

It is about time we realize that Wall Street is run by organized crime, which now extends its reach into the government itself.