Punishing the entrepreneurial class. Why Steve Cohen is in such trouble while bank CEOs aren’t.

John Cassidy has a great discussion of this at NewYorker.com

It’s a question that’s been nagging at me for some time. Not a desire to see anyone be punished so much as a desire for the punishment of white collar crime to seem less arbitrary.

Steve Cohen, Jamie Dimon and Brian Moynihan. Only one of these guys is in deep trouble with the SEC.
Steve Cohen, Jamie Dimon and Brian Moynihan. Only one of these guys is in deep trouble with the SEC.

Compare the fates of Steve Cohen of SAC and the CEOs of JPMorgan and Bank of America. Cohen has been pursued for the better part of ten years. His outside investors have largely abandoned his funds. He has already paid $616 million in fines to the SEC to settle civil accusations of insider trading. But that wasn’t enough. His firm was indicted and now prosecutors are said to be considering going after the bulk of Cohen’s fortune, on the grounds that it may have been earned through insider trading. 

Steven Cohen is not an easy man to sympathize with. The few scraps of information which seep out of his cloistered world suggest a brooding, demanding character consumed by accumulating wealth and its trophies, notably art.  He seeks neither the limelight nor popular acclaim.

It may be that the SEC has further evidence on Mr. Cohen which would freeze the blood. But for now, his punishment seems extreme in the context of what we have seen in the financial industry these past few years. Wall Street executives guilty of what seem more epic and socially harmful misdeeds, have been allowed to write settlement checks with shareholder money and walk away untouched.

A shortlist of recent major bank settlements. Last month JPMorgan agreed with the Federal Energy and Regulatory Commission to pay $410 million to settle allegations that it manipulated energy markets in California and the Midwest. A couple of weeks earlier, Citigroup paid $968 million to settle charges that it sold faulty mortgages to Fannie Mae. Goldman Sachs paid $550 million in 2010 to settle charges that it misled investors in a subprime mortgage deal. In January, the major banks agreed a collective $20 billion settlement of charges of irregular mortgage and foreclosure practices. HSBC and Standard Chartered Bank were heavily fined for facilitating transactions with sanctions-barred countries such as Iran, Sudan and Libya. Then there were settlements for improperly increasing minimum payments for credit cardholders and overdraft fees for debit card users. @PeterEavis writes in today’s @Dealbook of the reverberative effect of $GS’s sub-prime trades among homeowners.

Yet the banks rumble on. Their executives keep getting paid and their business remain in rude health. Every time they are accused of filching from the public, they their fine and move along, protected by their size. No one, including the SEC, wants them going down, no matter the cumulative impression created by all these settlements that these are organizations either too complex to manage or ethically badly astray.

The only bankers brought to court seem to be the underlings, junior figures like Fabrice Tourre of Goldman Sachs, and now a couple of JPMorgan bankers involved in the disastrous “whale” trades.

Let’s say that the punishment already dealt Mr. Cohen and his business is justified. That he is not just an enabler of insider trading but an insider trader himself. To use the SEC’s own language, he would  be guilty of having undermined “investor confidence in the fairness and integrity of the securities markets”.

On the books, insider trading is a crime, but eminent economists debate whether it should be. Milton Friedman said it brings information more quickly to the market, so we need more of insider trading, not less. On the other hand, a healthy, liquid securities market depends on the appearance of fairness.

There is no such debate over the cases settled by the major banks. They have been repeatedly and convincingly accused of stiffing thousands of their clients, and doing plenty to undermine investor confidence in the fairness and integrity of the financial services markets.

Mr. Cohen is still $9 billion and change away from the poor house. No one will shed tears for him or any other billionaire caught in the SEC’s crosshairs. Perhaps he should have settled earlier to save his business and reputation.

But it is worth remembering that he is part of the entrepreneurial class in finance. Hedge fund founders innovate, take risks, create jobs and if successful are rewarded lavishly for their efforts. The danger is that at the first whiff of trouble, their investors skitter. The SEC knows this. They can destroy a hedge fund just by announcing an investigation.

Banks, by comparison, are the corporate class. Their executives seem to get away with doing the most appalling things. Technicalities aside, treating the two classes so differently, the SEC is sending a message about the behaviors it is willing to tolerate. Rough stuff from bank executives, but a much higher standard from hedge funds.

If I were Mr. Cohen, I’d feel quite righteously cross. And if I were a senior executive at a major bank, I’d feel grateful to be able to fire and duck behind such impregnable, corporate walls.

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