12:34 p.m. October 21, 2013

Huge Number, Tiny Punishment

In America, there is ample evidence that speeding tickets do not deter drivers from breaking the speed limit. So why does anyone expect a speeding ticket to stop the kind of systemic Wall Street fraud that cratered the economy only a few short years ago?

This should be this week's big question as the Obama administration excitedly leaks news of a multi-billion-dollar settlement with JP Morgan Chase over allegations that the bank and its subsidiaries engaged in rampant securities fraud in the lead up to the financial crisis of 2008.

Though its details have not yet been fully disclosed, the settlement is already being trumpeted by its proponents as a "record penalty" - in hopes that the buzzword "record" seems like an impressive feat. But a look at what the topline number means in context suggests the announcement is hardly a sign of a belated get-tough-on-Wall-Street attitude by the Wall Street-funded Obama administration. It instead looks like a speeding ticket-esque slap on the wrist - and a harrowing reminder of just how dangerously financialized the American economy has become.

The critical contextualizing data points - the ones being omitted from the coverage of the settlement - can be found in JP Morgan Chase's annual earnings statements. As you'll see when you peruse them, between 2005 (the first year it is accused of defrauding investors) and today, the bank recorded a total of $652 billion in revenue, or an average of roughly $81.5 billion of income every year. For its crucial role in the mortgage-backed securities heist, the bank is now being asked to cough up $13 billion. Wall Street-worshiping let-them-eat-cakers like Rupert Murdoch would have us believe the government's request is an act of theft by a Marxist White House. Yet, $13 billion is not only less than the $22 billion to $33 billion cost of the specific transactions in question - it is also only a mere 2 percent of the $652 billion JP Morgan Chase raked in since it started committing the alleged crimes in question.

This is where the speeding ticket metaphor comes in. If JP Morgan was an ordinary American named John Morgan who made the median $50,000 a year, a fine of 2 percent of Mr. Morgan's gross income (aka revenues) is the proportional cost of a single speeding ticket. Granted, it would be a relatively expensive $1,000 speeding ticket, but with surcharges, court costs and insurance premium increases, such a ticket price is not something entirely out of the ordinary - and it is not an amount that typically prevents Mr. Morgan from speeding again.

What should be out of the ordinary - but isn't - is only getting a slap on the wrist for doing what JP Morgan and its properties Bear Stearns and Washington Mutual are accused of doing. After all, according to the allegations against them, they sold fraudulent securities which then created a ripple-effect of losses for pension funds and public agencies, ultimately costing consumers and taxpayers huge money. As just one example of those losses, the federal government - read: taxpayers - has spent $187.5 billion floating Fannie Mae and Freddie Mac after mortgage-backed securities destroyed their balance sheets.

In other words, what JP Morgan Chase is accused of doing isn't the equivalent of average guy John Morgan momentarily revving his Camry up to 80 in a 65 mile per hour zone. It is the equivalent of John Morgan commandeering a Bigfoot Monster Truck and driving over people's houses at 100 miles an hour while fleeing the City Hall treasury he just robbed - and then only being assessed a moving violation by public officials somehow congratulating themselves for being "tough on crime."

As mentioned above, social science research tells us that speeding tickets don't deter minor infractions like speeding - so, again, why should we expect such slaps on the wrist to deter far bigger crimes like, say, defrauding investors and laying waste to the global economy?

The answer is: we shouldn't. We should instead see the settlement announcement as yet another example of the government expecting the public to get confused by seemingly huge numbers, and then making sure fines are so comparatively small that they become to Wall Street just a rounding-error cost of doing fraudulent business.

To appreciate why that word "comparative" is so important and what it really means in the world of banking, think again about that $13 billion number. It sounds like a huge amount - and if a penalty of that size was assessed against a leading company in most industries, perhaps it would be enough to send a real message of deterrence. But the financial industry is not most industries. It is a grotesquely outsized Godzilla that now represents more than 8 percent of the entire economy.

That financialization of American society - which is a very new phenomenon - comes with all sorts of negative effects. One of them is to make a seemingly huge $13 billion penalty into kabuki theater. Indeed, in the context of the industry's monstrously huge annual profits, such a fine is not an income-calibrated European-style speeding ticket designed to deter future behavior - it is headline-grabbing spectacle designed to create the illusion of law enforcement without any serious attempt to deter future law breaking.

Another effect of financialization is Wall Street's power to turn its outsized profits into massive campaign contributions and consequently create an entirely separate legal architecture for itself - one that tends to fetishize soft speeding-ticket-esque fines and avoid the punitive punishments doled out to other criminal enterprises. That ends up making a mockery of both the constitutional notion of "equal protection under the law" and the (once) sacred principle of punitive damages.

The good news is that despite President Obama fawning over JP Morgan Chase CEO Jamie Dimon, his administration's Justice Department was evidently too embarrassed by PBS Frontline's recent blowtorching to take criminal prosecution of Dimon's bank entirely off the table - at least for now. That's real progress from just a few months ago, when - before the PBS special - the administration's similarly weak speeding ticket for HSBC also included a blanket promise to suspend any criminal charges whatsoever.

But, then, despite the progress don't forget: there's a big difference between the theoretical possibility of prosecution and actual prosecution - especially when Justice Department officials have already been lauded as heroes for assessing mere speeding tickets.