Saturday, September 26, 2009

Coordinated Policies or Vigilante Justice?

The former present of Sinopec is sitting in a Chinese prison under a suspended sentence of death for having taken $30-million in improper payments. The founders of Satayam Computer Services, their accountants and various others are stewing in an Indian jail, while their individual responsibilities for the fraud dubbed 'India's Enron' earlier this year are sorted out. Both Sinopec and Satayam (now Mahindra Satayam) survived the malfeasance, continue to employ thousands of staff, and remain participants in their respective national economies. Even their stockholders survived.

Meanwhile, if you look at the aftermath of the carnage caused on Wall Street or the City of London by the practitioners of global finance, you find utterly no parallel success in holding the most senior executives of the institutions that failed personally accountable. A couple of hedge fund managers at Bear Stearns are on the scorecard, and that's about it. When you consider the arguments being made several years ago that superior corporate governance and a more sophisticated regulatory regime were competitive advantages of U.S. and Western finance, and a 'public good' to be exported to less advanced countries, you can reasonably ask yourself why anybody would want to import a system so demonstrably ineffective? All it yielded was behaviors sufficiently marginal and arguably non-criminal that they could not be effectively condemned and punished.

There is one American practice that has been pioneered for the last generation that the rest of the world might want to consider adopting. The United States government has aggressively pursued extraterritorial activities with conseqences within the United States which violated U.S. law. Leaving aside the issue of pursuing terrorists abroad (more a matter of national defense than enforcement of domestic laws), the least controversial of these initiatives has been in combatting drug trafficking. The United States government has, with considerable success, pursued various Columbian drug lords for their activities outside the United States that had inevitable consequences inside the United States.

Various agencies of the United States government have been willing to pursue overseas activities that led to domestic consequences in connection with other, less clearly criminal activities. The trials and tribulations of UBS in connection with facilitating tax fraud and evasion are currently in the media. A few years ago, there was some controversy over rendition of several British bankers who had defrauded their (British) employer, in connection with the Enron affair. From time to time, the Department of Justice has pursued foreign cartels fixing prices who met (outside the U.S.) to set prices within the country. In each situation, there must be a jurisdictional nexus with the United States, but it can be pretty attenuated.

What does all this imply?

Well, there is a choice. The G-20 can announce its intention of pursing lowest common denominator coordinated action to regulate financial institutions and cap banker pay. Or individual countries can leave Pittsburgh and take advantage of the announced common intention and each pursue its own more or less aggressive approach dealing with the issues. The opportunity to follow the American lead and assert extraterrorial jurisdiction is there.

Then the prudent banker would be well advised to comply with the most restrictive regulation arguably applicable to his activities. Might throw a bit of cold water on the animal spirits.