Bailout

Why harsh white-collar sentences make sense

By Felix Salmon

Matthew Kelley asks whether the 14-year sentence for the former head of El Paso Corp.’s natural gas trading business isn’t excessive; my feeling is that it makes a certain amount of sense.

For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon. Indeed, the opposite is arguably the case: in the case of most crimes, it’s pretty obvious in the wake of the crime that a crime has taken place, and as a result a police investigation is immediately launched. Much of the attraction of white-collar crime, by contrast, lies in the fact that if it works, there’s a very good chance that no one will ever know that a crime ever happened at all.

As a result, a much lower proportion of white-collar crimes is investigated than of crimes as a whole — and that’s before you get to the question of whether or not they can be successfully prosecuted. After all, these are complex things, and hard to prove beyond reasonable doubt, as the prosecutors of Ralph Cioffi know full well.

Given (a) the low probability of being investigated, then, along with (b) the far-from-certain probability of being successfully prosecuted even if you are investigated, and (c) the enormous potential rewards, it’s easy to see how white-collar crime is very attractive. And the government has very few tools against it beyond very stiff sentences for those criminals who are investigated and tried and found guilty.

Against all of that one has to put the strong principle that the punishment should always fit the crime — and in this case, which is arguably victimless, a 14-year sentence does seem harsh. Still, it’s important to remember the amount of money involved in these cases. Few Texans would object to a 14-year sentence for a simple thief who stole $1 million, and I’m sure that James Brooks ended up making much more than that in excess bonuses tied to his fraudulent reporting.

More generally, it’s easy to lose sight, in the high-speed world of trading, of the fiduciary responsibility shouldered by people moving billions of dollars of other people’s money. A huge amount of the anger directed at Wall Street, especially in the wake of the financial crisis, is a result of the fact that this is real money we’re talking about here, and a lot of the brash young traders on the Street seem to have no conception of the value of a dollar. If sentences like this help to sober them, that’s undoubtedly a good thing.

Full post as published by Macroprudential on December 21, 2009 (boomark / email).