Billions and Billions in Fines. Sort Of.

With great fanfare, the Justice Department has announced a settlement with JP Morgan Chase, bringing a close to a batch of civil investigations on payment of a "record" $13 billion fine.

$13 billion sounds like a boatload of bucks to me. And it is.: "The settlement amounts to roughly half the bank's annual profit," report Ben Protess and Jessica Silver-Greenberg in a DealBook piece in today's New York Times. The writers quote US Attorney General Eric Holder:

The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.

But the "size and scope" of the settlement isn't quite as rich as it appears at first.

For one thing, it includes a $4 billion settlement reached earlier this fall with the Federal Housing Finance Agency. So it's really a $9 billion settlement.

Still pretty good, right? An acknowledgement that things got crazy out of whack, right? Not really.

As Matthew Yglesias points out in his article for Slate, "just $2 billion takes the form of an actual fine." (I like that "just"!) As for the rest: "The $7 billion in other compensatory payments Morgan will have to make is tax deductible, which assuming they've got smart accountants and lawyers working for them will reduce the real pain by somewhere in the $2-$3 billion range."

And as David Dayen writes for Salon (full article, here),

Nearly half of the [$9 billion] figure comes in the form of “mortgage relief,” which an independent monitor (and what’s so independent about a monitor chosen by the bank?) has four years to distribute. Any time you extend the time horizon of a penalty, you’re reducing its real value.

Sigh.

The government had earlier claimed that it was holding out for an admission of guilt, but in the final statement, JP Morgan Chase admitted to no violations of law. Thankfully, Justice did get a concession that the bank would not try to recoup any of the $13 billion from the Federal Deposit Insurance Corporation (yes, you read that right. New definition of chutzpah!)

Tony West, a senior Justice Department official who worked on this "deal", apparently believes that steep fines will discourage repeat bad behavior.

I wish I thought he was right.

Instead, I'll agree with Bart Naylor, a policy advocate at Public Citizen, whom Protess and Silver-Greenberg quote: "Unless you hold the executives accountable, it really is just the cost of doing business."

Truth or Falsies?

In the greater scheme of things, the truth -- or lack thereof -- of a cosmetics advertisement doesn't rank very high.

Especially when most of us know how faked they are, Photoshopped to the nth degree. I buy / use cosmetics and not since I was 13 or thereabouts have I thought, If I use that brand of mascara, I'll look exactly like that gorgeous model.

But still.

Today's New York Times carries an article by Andrew Adam Newman about the truth (or lack thereof) of mascara ads. For those of you who aren't regular cosmetics buyers: mascara ads all look alike. They all have close-up photographs of impossibly beautiful women (almost all Caucasian), with amazing eyelashes. Then they have technobabble about the new highly-engineered applicator or the new mascara formulation to assure you that you will have the fattest, longest, darkest lashes ever.

But the most important part of the picture is that all the women in these ads have lash extensions (aka falsies). It's not physically possible to get that batwing look without them. Most mascara ads get around this vexing little problem with tiny type at the bottom of the ad along the lines of "model styled with lash inserts".

Me, I hate small type. I know it's where the important stuff is hidden, and I hate having to hunt for it. (One of the few things I remember from my business-school accounting classes is: Always read the footnotes; that's where the important stuff lives.)

Newman's article is a follow-up on a decision issued in September by the National Advertising Division (NAD) that Maybelline needed to 'fess up, in the body of the ad, about their use of false lashes in advertisements for "Volum' Express the Rocket" mascara. The company could, NAD decided, continue to claim such important qualities as "8X Bigger. Smoother. Even." but the lash extensions either had to be peeled off or acknowledged. (Click here for the NAD press release) Maybelline is appealing the NAD decision to the National Advertising Review Board.

This isn't the first time, as Newman points out, that mascara ads have gotten a, you should pardon the expression, black eye. For example, in 2011, Procter & Gamble agreed to pull an ad for a CoverGirl brand mascara whose model's lashes had been "enhanced" in post-production.

But my favorite quote from the article is from NAD director Andrea Levine, who said simply, "What the big type says, the small type can't take away."

If you think about it, those are words for all of us to live by.

Carrot? Stick? Carrot? Stick? Yes.

We all know that both carrots and sticks can be effective ways of getting people to behave as we want them to. The question is, Which is better?

The answer, of course, is: It depends.

Most individuals respond better to carrots than to sticks, but if you're going to start incentivizing, you need to be sure that you're incentivizing the right thing.

Today's New York Times "DealBook" section has a fascinating article by financial services strategy consultant Doug Steiner, who argues that "minor, even imperceptible changes to workflow can significantly affect honesty".

For example:

....Financial institutions rely on their lawyers to determine what traders can “get away with.” Legal opinions that seem to countenance aggressive trading can reinforce troubling behavior on the part of traders and their firms. Showing lawyers the profound influence they have on trading action might dissuade them from endorsing or seeming to endorse questionable decisions.

In other words, encourage your people to do the right thing, rather than telling them how close to the wrong thing they can go.

Steiner bases his proposals on research that behavioral economists have been doing in recent years (Steiner himself works for a behavioral economics firm), particularly the work of his academic partners, the University of Toronto's Nina Mazer and Duke University's Dan Ariely (I have quoted Ariely's work previously -- here -- when I argued for clear, strict regulation, because "what we do best is delude ourselves").

But it's not enough to nudge. In addition to encouraging your people to do the right thing, you have to make it clear that doing the wrong thing will have real, negative consequences. And this is where many companies fail spectacularly. As one commentator to Steiner's article wrote:

In each of the situations [of observed malfeasance], when found out, the decision taken by upper management was to ‘quietly’ let the employee go. Charges were never laid, nor the rest of the employees advised the details of what had transpired. By quietly sweeping these transgressions under the rug and not making them public to the other employees, management inadvertently sent out the message, that it was okay to steal or cheat.

I've seen worse: the company that punishes everyone for the misdeeds of an individual, rather than firing the offending employee.

But the effect is the same: It must be OK to do what "everyone else" is doing.

Good News, Bad News

In March 2012, I wrote that it looked as though the many investors -- some of them very small investors -- who lost everything in the collapse of MF Global just might get their money back.

It's taken a while, but indeed it now looks as though it's happening.

Today's New York Times carries a DealBook column by Ben Protess (who covered much of the disaster that was MF Global) reporting that MF Global customers are "now all but assured" of receiving "every last penny" of the $1.6 billion that, shall we say, vanished from customer accounts.

Many of the firm's original customers sold their claims to banks and investment firms, unsure that they would ever see the funds owed to them. US customers have already received nearly everything that they lost, but overseas customers are the ones who will really benefit, having to date recovered only about three-quarters of their money.

The MF Global story never got as much coverage as I thought it deserved. As I wrote exactly two years ago this month, MF Global was a brokerage firm whose chairman and chief executive officer, Jon S. Corzine, was a former Goldman Sachs partner, former New Jersey governor, and former US Senator from New Jersey. The firm made a number of bad bets, and, while desperately trying to find a buyer, made the unbelievably bad (not to mention illegal) decision to raid customers' accounts to try to stay afloat. In the blink of an eye, $1.6 billion in customer money disappeared. Corzine's resume got the company's downfall some press, and while there was a lot of commentary about the absolute no-no of using customers' money to try to prop up the company, few people seemed to care about the fact that -- while the business was imploding -- Corzine was trying to walk away with a $12.1 million severance package. Moreover, as many as 23 senior MF Global may have received six-figure bonuses for "helping" with the bankruptcy investigation.

There's no question that the return of customer money, taken illegally, is good news. The bad news, as far as I'm concerned, is that Corzine and his cronies got away with it.

Yes, Corzine is still facing private lawsuits and civil charges (filed in June by the Commodity Futures Trading Commission, click here for a Protess DealBook New York Times story from June of this year). But really? He got away with it. Completely.