Yesterday, Jon Corzine agreed to pay a $5M fine. Corzine embezzled over one billion dollars of his customers money in order to cover bad trades that he made. It sent shockwaves through the futures industry. People that were customers of MF Global weren’t the only ones hurt. If you owned exchange stock, you were hurt too. There was a lot of ancillary damage. Corzine destroyed billions in enterprise value with unintended consequences.
The entire industry lost confidence. This had never happened before, and at this scale. Here is what Economist Craig Pirrong, an expert on the futures industry, said back in October of 2012.
equityholders in firms teetering on insolvency, or which are insolvent, have a huge incentive to hide problems or commit fraud or take huge risks. It’s called gambling for resurrection. Fraud or concealment permit the firm to survive-and maybe it will get lucky. If things get worse-that hurts only the bondholders, who lose more when the firm loses even more value.
A five million dollar fine? It’s pretty disgusting. It took four years. Just long enough for most of America to forget. Most Americans don’t understand the world of finance and neither do members of Congress. I even know regulators that are clueless.
However, it brings up a terrifying point. Clearly in America there are two justice systems. If you are wealthy enough and hyper politically connected, you can do almost whatever you want as long as you are willing to pay for it. In Corzine’s case, he was a Democratic Senator, Democratic Governor, and one of the biggest bundlers for a sitting Democratic President. The Department of Justice declined to do a thorough investigation.
If it sounds similar, it should since it’s pretty clear presidential candidate Hillary Clinton reaped the benefits of the same system. By the way, I am not seeing any moral outrage from Democratic Senator Elizabeth Warren over the Corzine mess and the failure of justice. I guess you only target your moral outrage to political opponents, or targets of opportunity like Wall Street. Bob Adelmann writes, It’s one thing to risk one’s own money. It’s another thing entirely to push that risk onto unsuspecting and uninformed customers. Even worse, it’s wrong to lie that he never intended to do it.
If you or I tried to pull the same shenanigans, we would be ruined and in jail.
Some other news came out yesterday that further illustrates the two tiered justice system. It also illustrates the speed of justice when you are on the wrong side. Do you remember the outrage over Mylan, the Epipen maker? It was a month ago. They charged an arm and a leg for a product that had a vertical elasticity of demand. It’s a classic business school microeconomics problem being played out in real life. If we look into why Mylan was able to do that, it had everything to do with government regulations set forth by the FDA that restricted competition. Absent those regulations there is plenty of competition and Mylan has to price the Epipen where marginal revenue equals marginal cost.
Yesterday, Mylan agreed to pay a $465M settlement to the government. I guess they didn’t write checks to the correct politicians.
What happens in the future? It makes money enter the political fray even more. It encourages companies and high profile individuals to curry favor with politicos, and agencies. You won’t be invited to the party unless you can pay a high price tag to get in.
What do the individuals and companies get? Clearance. A wink. The ability to operate. I think you know what you get.