Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Saturday, October 28, 2006

Why Oh Why Can't We Have a Better Press Corps? (Economist Edition) Why Oh Why Can't We Have a Better Press Corps? (Economist Edition)

The Economist blows yet another one:

Corporate crime | Jail time for Jeffrey | Economist.com : Is the sentence handed to Enron's ex-boss excessive?

The sentence of 24 years and four months handed to the former boss of Enron on October 23rd is slightly less than the record-breaking 25 years in prison being served by Bernie Ebbers, the former boss of WorldCom.... Skilling's lawyers had sought a sentence of just seven to ten years, citing his good works in the community and the fact that his convictions for fraud and insider trading, connected with the collapse of Enron in 2001, were his first....

[T]here are growing worries about the severity of America's white-collar sentences, which treat bosses more harshly than drug dealers and some murderers.... America also treats white-collar offenders more severely than other rich countries. Nick Leeson... who brought down Barings Bank, served just four years of a six-and-a-half-year sentence. And South Korea's courts sentenced Kim Woo Choong, a former boss of Daewoo, to ten years--despite his fleeing the country after the group collapsed.

That Mr Skilling's sentence was so much harsher than that of Andrew Fastow, the former chief financial officer whose role in Enron's collapse was far clearer, has also caused disquiet. Lawyers feel that Mr Fastow, who received a six-year sentence last month, was rewarded for co-operating with prosecutors, while Mr Skilling was punished simply for asserting his constitutional right to go to trial.

His conviction and lengthy sentence highlight America's growing "criminalisation of agency costs", says Larry Ribstein, a law professor at the University of Illinois. To get the benefits of diversified public ownership of firms, shareholders must delegate responsibility to managers, or agents. But agents do not always do the right thing by shareholders. Should such agency costs be handled by means other than criminal prosecutions and jail terms? Mr Ribstein thinks so. Civil litigation against managers and stricter corporate governance might be less costly and less likely to discourage legitimate risk-taking, he says...

What "legitimate risk taking" could possibly be discouraged by sending Mr. Skilling to jail? This makes sense only if telling your CFO to commit fraud in order to push losses off into future years is "legitimate risk taking."

Quality control, people. Quality control. The suggestion that fraud by managers be dealt with only by civil litigation is as stupid and short-sighted as the suggestion that theft and violence be dealt with only by civil litigation.

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