Another Example Of Why Scandals Seem To Work In Favor Of Sandalous Scoundrels: Big Business Wins Again

A Fine That Fits the Crime

In our country, if a big business with high-mucky-muck connections and enough capital flowing through its greedy fingers involves itself in scandalous ripoffs of "the little people" they can get away with it is the agree to toss a few meager coins to the powers that be... and of course, after the lawyers get their piece of the pie, and the courts get their fees, and the bottom line is calculated, it all amounts to the general public, the customer/consumer and the process of justice getting a royal screwing... without a kiss, reach-around or even a thank you.

THE mutual fund scandals, which exploded with a thunderclap of attention in September 2003, are winding down. You might even say they are over. The more or less final act came earlier this month, when Bear Stearns agreed to a settlement with the Securities and Exchange Commission under which it would pay $250 million to investors for its alleged fund-related transgressions.

If one represents "yelling at customers" and 10 is "stealing their money," what Bear Stearns did was a solid six on the scale of Wall Street improprieties. Professional traders, mostly at hedge funds, had engaged in rapid-fire trading of otherwise innocent-looking mutual funds. This seesaw damaged the funds' net asset values and thus the IRA's and 401(k)'s of small investors. By some accounts, traders had been doing that kind of thing for many years, until regulators and, particularly, Eliot Spitzer, the New York State attorney general, nabbed them.

Through it all, regulators have relied mainly, though not exclusively, on monetary sanctions. Bear Stearns's wasn't even the largest — Bank of America holds the record at $675 million.

But while these large "fines," as they are usually called in the news media, are reassuring, it's arguable at best whether they mean very much to the companies being penalized. Just as the hedge fund giant Long-Term Capital Management was too big to fail in 1998, when it was bailed out to keep from torpedoing the entire financial system, the biggest Wall Street firms are simply too large to be effectively punished. At least, not by the kind of sanctions meted out to Bear Stearns.

To begin with, Bear Stearns did not pay a "fine." The company will pay $250 million in "disgorgements and penalties." The penalty part was just $90 million. The other $160 million consisted of restitution, with interest, of profits gained by abetting the illicit trading from 1999 to 2003. As is typical in S.E.C. settlements, Bear Stearns agreed to pay all this money without admitting or denying the allegations.

Whatever you call it, the simple fact is that a firm the size of Bear Stearns can easily afford to pay that kind of money.

Sure, the $250 million comprises nearly half of the company's net income for the first quarter. But keep in mind that this is not "income" in the sense of the word used by most people. The corporate term of art describes (broadly speaking) revenue in excess of expenses — what most people would call "money tucked away for a rainy day." If you had committed a crime and as punishment you had to give up half of what you would normally put in a savings or retirement account over a three-month period — well, would you complain? I certainly wouldn't. I'd sign a settlement like that, particularly if I didn't have to say I did anything wrong.

When compared to what most people would define as "income," the penalty shrinks to a hair under one-fifteenth (one-14.6th, to be exact) of Bear Stearns's gross revenue of $3.6 billion during the first quarter. For most households struggling to make ends meet on $100,000 a year, a fine of one-14.6th of three months' pay would come to about $1,712. That's about, oh, maybe 15 unpaid New York City parking tickets?

The penalty has the same unimpressive quality when compared to Bear Stearns's total wealth. The company's shareholders' equity is just shy of $11.2 billion. Divided into that sum, the $250 million shrinks way down to one-44.7th of the total. Now really, if you were caught doing something allegedly illegal, and had a net worth of, say, $200,000, would you object to a fine of about $4,500?

To be fair, I should point out that Bear Stearns did more than just agree to pay some money that it didn't admit owing from all the things it didn't admit doing. The firm also agreed, among other things, to hire a consultant to ensure that all the stuff it didn't admit doing never happens again.