If I rob a federally insured bank and make off with $20,000, I'm facing years of federal prison time. If I defraud federal insurance programs, be they FHA or Medicaid, I'm also facing years of prison. If I engage in insider trading, I could also be looking at prison time (although that's pretty rare).
But if I rig the most widely used interest rate index in the world, a leading bank regulator doesn't think that the Department of Justice needs to be notified because they're not part of the regulatory working group focused on LIBOR. That was Timothy Geithner's explanation today as to why he didn't notify the DOJ when he learned of Barclay's LIBOR fraud. For real? What's next? The dog ate my homework?
It all leaves me scratching my head. The harm from the LIBOR rigging is massively greater than any of the other financial crimes for which we send people to prison. Why wouldn't the then head of the NY Federal Reserve Bank think that this was potentially a criminal matter? The "not part of the working group" is just about the lamest excuse I can think of. I don't normally talk to the police, but I call them if I think there's a crime in progress.
So perhaps Geithner simply didn't think the wrongdoing was criminal or even potentially criminal. How is that possible? My hypothesis is that it simply isn't comprehensible to Geithner that senior executives in financial institutions could be engaged in criminal behavior. Criminals don't wear suits. They use six-guns, not fountain pens. Perhaps many bank regulators are simply too cozy with bankers to see them as even potentially criminal. They might have gone to college together. They interact regularly and their careers are intertwined. They may be part of the same social milieu and may even socialize. Institutions might get fined (without admitting any wrongdoing), but criminal penalties? Not for these kind of people.
I'm not sure how one can possibly test this hypothesis, but I've started asking my students about it. Some of them, I figure will one day be prosecutors and regulators, and need to be prepared to deal with this situation. I ask them if they would have any reservations about sending the person sitting next to them to prison for 20 years or if they could lock up a college acquaintance. When I ask, I'm not really looking for a specific answer, although the conversation can be interestign. Instead, the questions are meant to drive home the point that it's a lot easier to prosecute someone with whom you have no connection than someone close to you. Regulatory capture seems to shape the way we regulate financial institutions in an endless number of subtle ways.
As an aside, I wish the NY Times coverage of the hearing were a little more probing. The fact that Dems rushed to Geithner's defense, while the GOP attacked him is sort of like reporting "dog bites man." It's election season already in DC, and that means it is not possible to have a real conversation about any policy issue until 2013. Every hearing now is political theater, more so than usual. Speaking of which, did anyone notice the incessant string of mid-summer Dodd-Frank hearings? It's amazing to see how regulations most of which are not yet in place are responsible for choking credit to the economy for years and for the travails of community banks which have been dropping like flies for decades. Logic disappears in bad cases of electoral fever.