To show how this plays out in real life, let's say that you are one of the millions of long-term Citigroup shareowners that have have a couple hundred bucks of Citi stock in your retirement account. As of a landmark ruling earlier this week, your 2012 dividends look like they will be negatively impacted by charges that Citi lied to some customers about the (high) risk of some collateralized debt obligations it sold them.
Many observers guess that the case will still be settled out of court, but if the case goes to trial, guess who pays for the legal defense of the executives who made those allegedly misleading (fraudulent?) statements?
That's right, you do.
Guess who will pay any eventual judgement/settlement?
I'll give you a hint -- it isn't deducted from anybody's paycheck.
If the bank is found guilty of fraud, guess what happens to the handsomely paid Citigroup directors who are supposed to be accountable for big picture issues relating to the company such as -- I don't know -- how about, "Is our bank committing large scale crime?" You guessed it, not much.
If you want to see who pays for criminally poor corporate management of big banks, take a look in your retirement account and see how well those shares of "C," have held up since the alleged fraud took place back in 2007. See how that chart goes dramatically down and to the right? That's you and everyone you know paying for really bad business decisions by really, really highly compensated bankers. Weird how that works, huh?
To show the dynamics of how this works, let's take a look at a hypothetical scenario: Let's say someone sells you a house. Let's say that they provide you paperwork attesting that it is among the best engineered houses in the world. Then, after the house collapses in an earthquake you discover that it was built a major fault-line, the guy who sold you the house claims "nobody could have seen an earthquake coming."
So you sue him for fraud. But he's already got all your money and he uses it to take the building inspector out to dinner. He asks the inspector which consultant he should hire to undermine your claim and the inspector says "give my cousin a call."
Meanwhile you can barely convince the lawyer who wears a clown nose while wrestling with a chimpanzee in his TV advertisement that your case is worth taking. I mean, seriously, your broke butt vs. Richie Rich and the inspector's cousin? Get real. After a few meetings you realize it is in your best interests to just settle for whatever pittance you can get and move on. No legal blame is formally assigned.
And that guy who sold you that unsafe house? He will be rewarded with a massive year-end bonus. His boss is "indemnified" against civil suits so his legal costs fully covered too. That's what the lawyers are for, right? The lawyers that are paid for with your down payment. So what do you think this outfit does as soon as your case is resolved? They go out and do it again, of course.
That's pretty much happens time and time again with our biggest banks. Sometimes they get caught and have to pay a fine and/or apologize (for a good chuckle, I highly recommend clicking though on that hyperlink), but they pretty much never accept legal blame. Nobody is held accountable but while the executives keep collecting their year-end bonuses, the long-term investors shoulder the risk and are stuck with the bill when it finally comes due.
The problem is that the big banks have so much (of our) money to grease the wheels of justice defend themselves with that none of them ever go to jail. They just pay a fine with the corporate credit card and move on.
(Here's my prediction, one day soon we are going to learn that bankers are taking lavish trips with the frequent-flyer miles racked up from paying off the multi-hundred million dollar fines the SEC keeps hitting them with. You heard it here first, folks.)
We can change this dysfunctional dynamic by reducing director indemnification and executive liability insurance. If we want corporate behavior to change, the individuals who oversee those institutions need to be held to account.
My firm has a long history of using shareholder advocacy to try to make these banks to be more accountable. By honing in on director indemnification this year, we think we're really onto a reform that gets to the root of the problem. We are submitting shareholder resolutions with Citigroup, JP Morgan Chase and Bank of America, that would, if adopted, significantly alter who pays the costs of irresponsible business practices.
These resolutions seek to minimize bank directors indemnification for civil, criminal, administrative or investigative claims, actions, suits or proceedings.
Hopefully the next time a bank commits a crime, the guys who fell asleep at the wheel won't have their defense paid for out of your retirement account. We will only see significant improvements in bank behavior when their directors are liable for some of the damages caused by the institutions they are paid to oversee.