When you read about the latest federal prosecution or investigation of some or another big alleged wrongdoing, do you find yourself instinctively thinking that the target undoubtedly must have done something wrong?  After all, our prosecutors and regulators are trained experts lacking even a hint of self-interest.  Why would they conceivably invest all this energy in a major prosecution if there wasn't something really bad going on? 

And beyond that abbreviated thought process, it's very difficult for even the well-informed citizen to invest enough time and energy in studying the facts of any of these prosecutions to form a real independent judgment on whether the defendant did anything wrong.  So our instinct is to trust the government, and thus for the reputations of entities under investigation or prosecution to suffer or die, along with their businesses.  Combine this dynamic with a few dozen rounds of piling on useless and destructive regulation (see, e.g.,  Dodd-Frank), so that now scores of federal and state regulators and prosecutors have been given life and death powers over most large businesses, and you have an environment ripe for extreme corruption.     

How bad is the corruption?  Fortunately, from time to time big cases come along that are so obviously preposterous on their face that no great amount of study of the facts is needed to know that something is going terribly wrong here.   

I have previously written about the government's "sick game" with the big commercial banks.  That is the game whereby the government passes the banks billions upon billions of dollars by artificially keeping their cost of funds at or near zero for years (aka QE I, II, III,. . .,n) and then every prosecutor in the country gets to go collect a few hundred million, or a few billion dollars from one or more of them every so often in order to keep the prosecutor's name in the papers.  And thus, to take the example of just one of the banks, I commented on July 1 on J.P. Morgan's participation in a $25 billion settlement with 49 state AGs, Justice and HUD over alleged wrongful practices in enforcing underwater mortgages; and then on July 25 on JPM's settlement with FERC for about $500 million for alleged manipulation of trading in the California electricity spot markets (the alleged manipulation having had the potential effect of raising electricity prices to any given consumer by perhaps a few dollars, all while the state of California and the Obama administration seek an artificial doubling of electricity prices by imposition of a "cap and trade" carbon restriction regime);  and then on September 24 on JPM's settlement for $920 million with the SEC, where the SEC decided that the right "remedy" to punish JPM for the "London Whale" trading losses of about $6 billion was to force JPM to fork over yet another $920 million to the SEC.   

Each of these three settlements had some rather obvious facial absurdities.  But now we're coming to the big one:  the criminal -- yes, criminal -- investigation of JPM by U.S. Attorney Preet Bharara of the Southern District of New York, for alleged failure to discover and report the Ponzi scheme of Bernard Madoff.  The New York Times covered the story on October 23, and Professor Richard Epstein of NYU Law School has a long comment on the affair at the Hoover Institution site here.

The central irony of this one, of course, is that the government itself, in the person of the SEC, had both better information and better access to information about Madoff than JPM or anyone else.  The SEC had the right to inspect books and records.  The SEC had subpoena power.  The SEC actually sent people in to Madoff's offices no fewer than five times to conduct examinations or investigations.  The SEC had a well-informed guy named Harry Markopolos writing it one letter after another setting forth in layman's terms why Madoff's operation was and had to be a Ponzi scheme.  And compared to JPM or anyone else, it's actually the SEC's job, if they have any job, to figure out which operators are crooks and stop them. 

In 2009 the SEC's Inspector General put out a 457 page report on the agency's incredible failure to figure out Madoff over three decades (linked in Epstein's article).  Epstein summarizes the report as follows:  

 [T]he OIG found that the SEC had ample information in the form of “detailed and substantive complaints” from 1992 to 2008, all of which raised “significant red flags” about Madoff’s operations that the SEC then overlooked in “three examinations and two investigations” that turned up nothing. JPM is not mentioned once in that 457-page study.

But of course the SEC is the government so nobody can do any wrong.  Nobody even got fired!  Well, what good would that do, since they've never discovered any other single Ponzi scheme ever?  Could the next group of bureaucrats really do any better?

Epstein points out that Bharara is working on this one hand in glove with the Office of the Controller of the Currency, which has the ability to suspend JPM's charter and put it out of business without need for evidence, proof, or a trial.  So how much will JPM fork over on this one?  A good bet would be multi-billions.  If there's one sure bet, it's that JPM will not submit itself to a criminal trial and take any risk whatsoever of conviction, even .0001%.

The question is, when JPM (or some other big company) settles this one or the next five, to what extent should the informed public consider its reputation to be diminished by the assumption that it may have done something wrong?  There really isn't any reason to think that any one of these coerced settlements had any more solid basis than any other one, or than this latest absurdity.  Way too many ambitious prosecutors have figured out how easy this is.   Really, to the informed public, it's only the government's reputation that should be getting diminished.