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Peter Atwater: The Punishment Fits the Time


As social mood falls, sentences for crimes become more severe. Here's why investors should pay attention.

The hammer came down yesterday on Donald Sterling. Fined $2.5 million, the NBA will now seek to oust him as an owner.

Separately, this morning the Wall Street Journal reported that the Justice Department is planning to file criminal charges against France's BNP Paribas SA for doing business with sanctioned countries. Prosecutors want to show that no bank is "too big to indict."

Meanwhile, Twitter stock is down 10% as investors, concerned about the company's growth, dumped the shares.

Across society, the price being paid for violating the public's trust is high. Heck, even cartoonists are in on it now.

Gilbert and Sullivan suggest in The Mikado that "the punishment fit the crime." The reality, however, is different. History repeatedly shows that social mood drives the penalties paid by individuals and corporations.

When times are good, sentences are lenient. As mood falls, sentences become more and more severe.

While the markets are within a hair of their all-time highs, social mood has now entered its fifth year of weakness. Economic confidence, as measured by Gallup, is -15 today, about where it was four-and-a-half years ago in September 2009.

For more than two years, I've been writing that until social mood improves, litigation expenses will be a normal, recurring operating expense for the financial services industry.

The latest flurry of news reports suggests that harsh treatment (both financial and otherwise) has extended well beyond the banks.

So far investors have been ignoring this, but I wouldn't. In the current social-mood environment, not only are earnings at risk -- so, too, are earnings multiples. Smaller profits multiplied by lower P/Es could quickly translate to lower market values.

Finally, and for business leaders, in the current social-mood environment, orange jumpsuits could easily replace yellow power ties. Main Street wants accountability, and not just from Wall Street. With wages stagnant, the ire once directed exclusively at bankers looks to be broadening to capitalism in general.

This Sunday, the New York Times Magazine will have a story by Jesse Eisinger on the near-complete lack of individual accountability for the 2008 banking crisis.

I'd watch the reaction. It may give you a great sense for what's likely ahead.
Peter Atwater's groundbreaking book Moods and Markets is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -- Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation

Twitter: @Peter_Atwater
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Author holds position in SH and JPM.
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