Big Numbers, Little Impact

Trey Smith

Officials in the nation’s capital and California’s hailed this week’s announcement of a $410 million settlement with JPMorgan Chase as a win for consumers and a warning to big companies that try to manipulate electricity markets not to do it again.

But JPMorgan didn’t admit any wrongdoing in the case, and no executives were charged, prompting protest from Capitol Hill that the action didn’t go far enough. Some corporate governance experts say that large financial firms have come to consider such fines simply part of the cost of doing business.

Big fines alone can’t change the culture of high-risk trading that brought down firms such as Enron and nearly all of Wall Street, said Chip Pitts, a lecturer at Stanford Law School who specializes in corporate responsibility.

“The regulators are fooling themselves if they think this will be a deterrent,” he said.

The settlement includes a $125 million refund to defrauded customers in California and the Midwest, plus a $285 million civil penalty. Even if that refund was split only among Californians, each resident would see just $3.
~ from Fines May Not Deter Companies from Manipulating Markets by Curtis Tate ~

That is quite a tepid headline when you really scrutinize the numbers. On the surface $410 million sounds like a significant fine. It involves a number that few folks can even imagine. Few people in this country have more than several thousand dollars in the bank at any given time, so 410 million sounds like an unfathomable sum.

While it certainly looks like a large figure, in truth, it is miniscule when compared to JPMorgan Chase's total assets held. As of 2012, that figure is $2.509 trillion. The so-called big settlement amounts to 0.00000164 of this company's total assets.

To put these numbers in perspective, let's say you have total assets of $100,000. You've been hauled into court for some reason. The judge or jury has found you guilty and is set to announce the amount you will be fined. If your fine is equal to the percentage paid by JPMorgan Chase in the aforementioned settlement, you would be forced to pay...drum roll please...16 cents. If instead of a measly $100,000, you had $1 million in total assets, your fine would be $1.64.

Do you think you would feel that you had "learned your lesson"? Do you think you would feel sufficiently chastened to reexamine your life and head out of court in a new direction?

Of course not! You would continue doing the very same things that landed you in court and would be more than willing periodically to fork over your 16 cents or $1.64 without a second thought.

Folks, though $410 million sounds substantial, it is mere chump change for the financial behemoths. Since their illegal schemes net them billions upon billions of dollars in profits and the fines are so diddly, regulatory agencies and our justice system are doing little more than throwing up fancy window dressings, not providing strong deterrents to this kind of behavior. As long as the fines are nothing more than tiny pin pricks, it will be business as usual. As long as the top executives of Wall Street are not held criminally liable for their massive wrongdoing, they will be happy to "settle" for less than pennies on the dollar!