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Please punish me!

Dec 21, 2002

The high profile probe into the alleged wrong doings of the 10 largest Wall Street firms has ended with a settlement of US$ 1.4 billion. A fine, one would think, would be a punishment and an economic incentive not to break any more rules. Well, the table below suggests that breaking rules, being investigated, and then being fined under a settlement with regulators may actually be a good thing.

Firm Fine
(US$ m)
Change in
Mkt Cap (US$ m)
Wealth created
to fine paid
SSB (Citi) 400 3,268 817%
CSFB 200 155 78%
Merrill 200 262 131%
Goldman 110 707 643%
JP Morgan 80 3,225 4031%
*Change in Mkt Cap is the day the settlement was announced
*This is the wealth created by actions of the market
*Only CSFB has to recapture its payment: the others have more than
recovered their payment by an increase in overall wealth

The day the fines were announced in New York (December 20), the share prices of the fined entities rose sharply and the wealth created by the increase in market cap overshadowed the cash impact of the fine. The markets have voted that the fines were a lot less than expected and should not take away from the long term economic value of the Wall Street firms. There could also be a political reality that these firms account for hundreds of thousands of jobs in New York and the tri-state area and any severe punishment to them is a loss of income to the City, a loss of more jobs, and a loss of votes. Whatever the political or economic compulsions of the settlement, the average investor who got misled by tainted research may not see much of a benefit.

The traders on Wall Street may soon follow a new mantra:

  1. break the law
  2. cheat investors
  3. take a lot of bad press
  4. pay a fine
  5. create wealth, and all is forgiven.

For us in India, we know the game already. We have seen it now for over a decade with scams and scamsters appearing and disappearing like a monsoon ritual. The regulators call the scamsters, punish them with fines, many questions are asked in Parliament, and then JPC reports gather dust and life goes on. Well, China may be giving all Americans the “Made in China” toys and gizmos, but this settlement gift for Wall Street firms sure sounds like a “Made in India” product.

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