Lynn Stuart Parramore has a great interview with hedge fund whiz Jim Chanos about the nature of financial fraud.
Chanos points out that the Justice Department's reluctance to investigate fraud at the biggest financial institutions probably lowers the value of their equity.
We've had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission. Most people would agree that that's not the Justice Department's role. And I think it's caused a really reasonable, serious, continued undermining of trust in our markets.
While we may have benefitted from not revealing additional fraud during the dark days of '08 and '09 by indictments and so forth, I still think you have the exogenous cost effect of a lack of trust by our public and by other investors. In effect, it raises the cost of capital. It depresses valuations. If people think that the game is rigged and they're not in on it, they're going to put their money somewhere else. And that's almost impossible to quantify. But you know there's an effect.
In other words, Wall Street executives wondering why their stock continues to lag have their answer: The public doesn't trust them because they know the government is turning a blind eye to fraud.