Friday, March 8, 2013

Warren continues the assault. Why does Holder still have a job?

by taonow
THU MAR 07, 2013 AT 02:17 PM PST

Once again Sen Elizabeth Warren does America proud. Once again she asks the most obvious questions (why are banks not prosecuted) and gets the same stunned responses (what, prosecute banks, you must be kidding?).

Today we have the following classic Warren:

“You know, if you’re caught with an ounce of cocaine, the chances are good you’re going to go to jail,” Warren said. “If it happens repeatedly, you may go to jail for the rest of your life. But evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night, every single individual associated with this. I think that’s fundamentally wrong.”

So while Warren was trying to get Treasury officials to acknowledge that HSBC should have faced criminal charges for its massive drug money laundering, the real person that needs to answer the question was absent - Eric Holder - AG.

Again I ask. Why does Eric Holder still have a job????? The man who said ...

I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy

So yes ... prosecute the drug possessor, but if the drug money launderer is big enough let him/it go free (after payment of a small fine equal to a small percentage of the illicit gains.)

So a pretty short diary that covers some of the same ground as a diary on the rec list so lets add a bit more on why Holder really does need to get some himself some re-education.

I would recommend that Eric Holder watch this video. Maybe he will start to understand how he has been captured, how his background and how his experience make it almost impossible for him to "do the right thing" and fully prosecute law breakers, no matter how powerful they may be.
This is a really excellent video, but for those that do not have the time to watch it, here are some snippets from the transcript.

In this video Dan Ariely, a behavioral economist, talks about cheating and our intuitions (about cheating and other things).

But it was actually more interesting than that, because she said, "I did not think that your intuition was right. I felt my intuition was correct." So, if you think about all of your intuitions, it's very hard to believe that your intuition is wrong. And she said, "Given the fact that I thought my intuition was right ..." -- she thought her intuition was right -- it was very difficult for her to accept doing a difficult experiment to try and check whether she was wrong.

But in fact, this is the situation we're all in all the time. We have very strong intuitions about all kinds of things -- our own ability, how the economy works, how we should pay school teachers. But unless we start testing those intuitions, we're not going to do better. And just think about how better my life would have been if these nurses would have been willing to check their intuition, and how everything would have been better if we just start doing more systematic experimentation of our intuitions.

So step 1. AG Holder, lets do an experiment and see what actually happens when you prosecute a TBTF bank (something that Sen. Elizabeth Warren recently very clearly demonstrated that you NEVER do). Please, just once ... actually test you intuition. Prove to us that it is right, because our intuition is actually the opposite of yours.

The other interesting thing in the video is the discussion about how cheating (think banks) is influenced by the social norms of the group. Basically Ariely says, all people cheat, but cheat just a little. But there are conditions under which they will cheat more or less. For example, they will cheat less if actual physical money is involved (not stealing form a petty cash box, versus stealing a pencil from work), but will cheat more if the money is one or more steps removed (think tokens, stock options, derivatives ...), and the further removed the more likely the cheating.

Here is an interesting experiment:

So, we did another experiment. We got a big group of students to be in the experiment, and we prepaid them. So everybody got an envelope with all the money for the experiment, and we told them that at the end, we asked them to pay us back the money they didn't make. OK? The same thing happens. When we give people the opportunity to cheat, they cheat. They cheat just by a little bit, all the same. But in this experiment we also hired an acting student. This acting student stood up after 30 seconds, and said, "I solved everything. What do I do now?" And the experimenter said, "If you've finished everything, go home. That's it. The task is finished." So, now we had a student -- an acting student -- that was a part of the group. Nobody knew it was an actor. And they clearly cheated in a very, very serious way. What would happen to the other people in the group? Will they cheat more, or will they cheat less?

Here is what happens. It turns out it depends on what kind of sweatshirt they're wearing. Here is the thing. We ran this at Carnegie Mellon and Pittsburgh. And at Pittsburgh there are two big universities, Carnegie Mellon and University of Pittsburgh. All of the subjects sitting in the experiment were Carnegie Mellon students. When the actor who was getting up was a Carnegie Mellon student -- he was actually a Carnegie Mellon student -- but he was a part of their group, cheating went up. But when he actually had a University of Pittsburgh sweatshirt, cheating went down.


Now, this is important, because remember, when the moment the student stood up, it made it clear to everybody that they could get away with cheating, because the experimenter said, "You've finished everything. Go home," and they went with the money. So it wasn't so much about the probability of being caught again. It was about the norms for cheating. If somebody from our in-group cheats and we see them cheating, we feel it's more appropriate, as a group, to behave this way. But if it's somebody from another group, these terrible people -- I mean, not terrible in this -- but somebody we don't want to associate ourselves with, from another university, another group, all of a sudden people's awareness of honesty goes up -- a little bit like The Ten Commandments experiment -- and people cheat even less.

So what are the implications for AG Holder?

You might think, well the likelihood of getting caught does not impact cheating, so Holder is right for not prosecuting. That is not how I see it. Instead what we see is that the lack of prosecution creates a climate in which a group (bankers), as a group have developed the norm of cheating (because everyone does it), and since they are further removed form actual money, they don't really see what they are doing as cheating and so do a lot more of it.

The question then is how do we get a change in behavior.

Obviously a difficult question but we know part of the answer. When investment banks were separated from commercial banks (Glass-Steagall), and when investment banks were run as partnerships (not as public companies), there were far fewer problems. The main participants had to worry about reputation, and they were closer to the money (it was their money) than now (playing with shareholder or depositor money)

But it is also likely that prosecutions of TBTF banks, even if ultimately not successful, would send a message that is a bit like trying to recall the 10 commandments (reduced cheating in experiments), before a cheating opportunity. It would impact upon the mores of the individual and by extension upon the group. If everyone is looking around afraid that they could be dragged up to the front of the class, it is less likely that cheating will happen.

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