Crime and Punishment

Watching Madoff being taken away in handcuffs last week, I was thinking about crime and punishment, and whether those who recklessly led us into the current financial mess ought to share more of the pain, whether or not they committed a crime.

My son and my son-in-law, the former operating from his analytic side and the latter operating viscerally, have been arguing with me for months about society's need for some kind of "justice" for those people, particularly in the financial and mortgage industries who may never have broken any laws, or who never intended to hurt anyone, but who acted recklessly with other people's money and security and should have known better.

We do that already.

Remember O.J.? He was not convicted of a crime, but he received a judgment against him for $33.5 million (most of which he has not paid) to go to the families of Nicole Brown and Ron Goldman in a wrongful death civil suit.

And if you drive down a crowded downtown street at 60 mph, you can be convicted of a crime of driving to endanger, even though you technically did not intend to hurt anyone. The law says that being that reckless amounts to the same thing as having the intent to do harm.

At the very least, people in the mortgage business or the financial services business who are certified professionals ought not to be able to enjoy the fruits of their recklessness while so many of their clients are suffering. They have not only caused an enormous amount of pain, but they have undermined public confidence in two industries which are essential to economic growth and depend on a significant level of trust.

My law degree is gathering dust somewhere, but there are lots of brilliant minds out there who could be put to figuring out how society can hold these folks accountable, if not by putting them in jail, at least by taking away their ill-gotten gains.

Which brings me to two unsettling realities that cut the other way.

First, as pointed out by the ever-interesting Joe Nocera in his painful-to-read March 14 New York Times column, Madoff's victims were also his accomplices, not asking the hard questions, and taking his non-answers as satisfactory as long as the paper profits continued to roll in. Some of them actually enjoyed the benefits of Ponzi scheme, by taking some of their money out of his funds, others only by spending as if their paper profits were piled up under their pillows. But they had the power to bring him down and they did not because they were benefiting, or so they believed, by whatever he was doing. So our sympathy for them is mitigated. And we were all accomplices in some way.

Second, as pointed out by Andrew Ross Sorkin in Tuesday's New York Times, in an equally painful and unsettling column to read, there are two good reasons for the government not to squash the AIG bonuses, outrageous as the bonuses seem.

One, those bonuses were part of the employment contracts and invalidating those contracts would further erode trust in the commercial system. Second, for better or worse, we all have an interest in AIG having the best possible people in their seats helping AIG get out of the mess they helped it get into. Criminals understand the system better than those hwo have not tested it. Maybe some of those folks who are getting the big bonuses are who we need the most to be at AIG and who could most easily walk away from AIG and get other high-paying jobs? (But much of that argument was destroyed by the devastating front page story in Wednesday's Times, pointing out, among other atrocities, that many of those who got the bonuses have left AIG.)

Saying all that, it is simply not OK that those mortgage and bank folks who encouraged the risks, knowing that they would not be held accountable if the borrowers and investors lost everything, and knowing that they themselves would not be taking the same risks as they were encouraging their customers to take, can enjoy their lavish lifestyles without any pain other than the guilt they might be feeling as they have that second martini on the porch overlooking the ocean.

If nothing else, they have destroyed faith in the system which will hamper and delay the economic recovery and have negative consequences for years to come.

If the smart lawyers cannot figure out a way to get them to divest their ill-gotten gains, perhaps someone from that category will step up and start the ball rolling by voluntarily returning the bonus at AIG, or unilaterally changing the terms of some of those underwater mortgages, or in some other tangible way sharing the pain and divesting themselves. AIG CEO Ed Liddy has asked those bonus babies to give back 1/2. Too Liddle, too late?

This question came up this week on the Washington Post's On Leadership blog, where I and the rest of the panel were asked whether big-time basketball coaches and other highly paid people in organizations going through tough times should voluntarily give up some of their compensation. Take a look. This was after Connecticut basketball coach Jim Calhoun said he would give "not a dime back". Watch it on You Tube. Interesting range of views in the Post. What do you think?

Finally, a couple of people have written to suggest both that the idea of Reset is really resonating, but that they missed the earlier blogs on the subject which laid out the idea in more detail. Rather than having you scroll through them all, here are a couple of URLs that might help: the first Reset post and the second.