The rhetoric over “banksters” has been kicked into overdrive as intelligent people are seriously discussing the idea of imprisoning bankers whose decisions caused their bank to fail.
Here’s the idea expressed by Paul Collier in The Guardian:
…With bankslaughter, when the bank blows up – even if it is a decade later – a criminal investigation traces back to determine whether crucial decisions were reckless. If a reasonable banker faced with the information available at the time would not have taken those risks, the person responsible is dragged off the golf course and jailed.
Our John Carney ripped this apart yesterday, point out all kinds of problems: It would viciously curtail risk-taking, it would be pro-cyclical (encouraging even more bank cautious at a time like now when banks are already underlending), and the complexity of these causes would be ill-suited for the criminal world — besides, all relationships in banking exist through a contractual, voluntary arrangement.
But even John’s retort was too tame and polite.
For one thing, “bankslaughter” already is implicitly a crime. Anytime a bank fails spectacularly, prosecutors look for evidence of legal wrongdoing. If there’s enough public pressure, it’s always easy enough to find some evidence (an email, perhaps… maybe something said on a conference call) that the executives in question didn’t fully convey the full spate of risks to shareholders.
We don’t know yet if Dick Fuld will be prosecuted for the Lehman failure, but there’s nothing in the law currently that’s protecting him from a US Attorney hoping to run for Senate in a few years.
But obviously this deterrent didn’t stop the kind of risks that Collier would like to see criminalized.
Beyond that though, this idea of a “reasonable banker” not having made the decision at the time is nonsense on stilts. Essentially what Collier is saying is that ALL bank failure will be made illegal, since you’ll always be able to find a decision that a reasonable banker chose not to make. It’s an amazingly low threshold for what constitutes imprisonable behaviour.
Confirming the sheer ridiculousness of this idea, Felix Salmon defends Collier with a swirl of non-sequiters:
Is it reasonable to hold professionals criminally liable if they take reckless risks with other people’s money? I don’t see why not. Especially if they work at a leveraged and systemically-important institution. After all, people can be jailed for insider trading, which is far more of a victimless crime than bankslaughter.
Insider trading and “reckless risk” have nothing to do with each other, except that they both generally exist within the finance world. But his statement makes as much sense as saying “People are jailed for smoking marijuana, which is far more of a victimless crime than bankslaughter.” That’s hardly a point.
And even here he’s conceding that what’s not important is the “reckless risks” but the matter of recklessness at a “systemically-important” institution. But rather than resorting to defining down criminality, the government should remain laser-focused on this problem of how to minimize the existence of too-big-to-fail institutions. After all, the scandal in the financial crisis is not that people lost money — caveat emptor, baby — it’s that we had to bail out institutions that otherwise would’ve lost money, since they had us all hostage.
Hedge funds blow up all the time, and nobody calls for their head — not because they didn’t take “reckless risks” with other people’s money, but because they didn’t require a bailout. That’s the issue and this whole talk of bankslaughter (sure to be a popular word in the financial press, where everyone’s trying to outdo each other to prove how much they hate banks: “No, I was the first one to theorize that Lloyd Blankfein is the devil!”) is a ludicrous idea.
We wonder if Felix had been a banker whether he’d be guilty of bankslaughter. After all, in his research into the subject, he concluded early on that the issue of mortgage defaults wasn’t likely to be a huge deal. Later he changed his mind and of course, defaults proved to be a gigantic problem.
But if I were a prosecutor, I’d have no problem convincing a jury of 12 that a “reasonable” banker should’ve known that lending money to people of dubious credit risk, with low loan-to-value ratios, in an inflated market would’ve been a recipe for disaster.
Seriously, does anyone think a prosecutor couldn’t make that case today in 2009?
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