Comment by lucianbr
> The authorities can't and shouldn't base an exhaustive investigation on vaguely shifty CEO behavior.
Moral hazard. We are in this thread, where many people complain about the irrationality of the market, of bad choices having no ill effects, and at the same time it is argued that authorities should prioritize and only investigate and prosecute large cases where the ROI is good.
I think the ethical landscape created by this "selective investigation and prosecution based on ROI" is part of the problem. We officially abandon the concept that wrong-doing will get caught and punished as a rule and then we marvel that the markets are irrational and that bad actors profit and keep profiting over large time horizons. Who could have expected such?
I think over a longer time period these effects will compound and there will be larger and larger problems. You can't just abandon the rules because enforcing them is not cost-efficient and hope everything will be alright. But it does take time to see the effects so who knows when the larger problems will show up.
I broadly agree, except I think the greater moral hazard is in failing to prosecute the plain-as-day cases of fraud (regardless of size). I'm not arguing in favor of abandoning rules but given limited resources you have to prioritize somehow, and every prosecution strategy has significant externalities like those you touched on.