As the sheer magnitude of the unfettered lending and borrowing that has taken place over the last few years continues to unfold, I am hearing more and more calls to put banking and government executives who failed to prevent this (or knowingly encouraged this) on trial. I am inclined to agree with them. The BBC's Robert Peston just put out an excellent analysis of HBOS's final earnings report as a discreet entity:
This corporate division generated losses of £6.8bn in 2008 from loans and advances to businesses of £116bn. It has had to write off an average of 47% of those loans in this area that have gone bad. Almost 12% of all its corporate loans are now classified as impaired or damaged. And as a percentage of the total corporate lending book, the impairment charge is just under 6%. On the basis of those statistics, HBOS appears to have left a big bag of money open on the pavement with a sign saying "borrow what you want".
How can you give out over $100 billion in bad loans? In Spain, for example, their banking system, which has been one of the least affected by the crisis, operates using dynamic provisioning, where each loan mustbe underwritten with capital in the banks' reserves.But what has transpired in the US and UK banks is tantamount to executives knowingly driving their businesses into the ground at the expensive of getting fat and happy themselves. It's like hundreds of these executives were riding tigers without knowing when to get off. If I hear one more jingoistic anti-offshoring argument about the fact that a whole industry should be tarnished because a single service-provider was caught cooking the books… how about a whole industry cooking its books?
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For sure, they should be fired “for cause” (fiscal irresponsibility and negligence) and sued in class action suits by their shareholders and their depositors.
As you mention in Spain, in Canada we have a conservative and prudent banking system. Credit is well managed, banks here have little exposure to derivatives, and are reporting profits.
The US banks have been reckless and greedy beyond belief. And they ought to pay for that recklessness.
Frank Feather
the key question is “Did anyone see this coming” and “What did that person do to be the whistleblower” or ensure that this does not happen. Seems like everyone in the ecosystem from the banks to the mortgage broker to the real estate agent to the consumer to the producer ..all of them were part of the party when the FED, SEC and others were sleeping…The world is at a different equilibrium that is all.
Last Friday Bill Maher in his “Real Time” show on HBO quipped that a couple of the worst examples of banking greed and corruption, like Bernard Madoff, John Thain, and Rich Fuld, could be tried and executed.
He mused that such an action would cause other bankers to take notice and toe the line.
China has executed several of the executives charged with crimes against the people in the “melamine in milk” scandal, said Maher. It certainly acts as a warning.
I’m not a proponent of capital punishment, but for some of the bankers who made the most egregious moves, I might make an exception.
Phil,
I am all for accountability and I am certainly against broad-brushing an entire industry because of a few instances, be it offshoring or Banking.
However, what amuses me is when Government Officials and Politicians talk about “accountability” and about wanting to roll heads for this fiasco.
Are the politicians and Senators accusing Bankers of imprudent decisions or of fraud?
a. If the Bankers are accused of stupid and imprudent decisions, maybe the Politicians and Governments should have some shame and introspect on some of their own “wise and learned” decisions. Does anybody remember the search for “Weapons of Mass Destruction” and the “Central (Lack) of Intelligence Agency”? If the sub-prime crisis costs an astronomical sum to fix, does anybody take responsibility for USD3 trillion (YES, 3 trillion) that the US government has spent on Iraq with no WMD in sight? See enclosed article in Washington Post. So should we put somebody on trial for such “bad decisions” based on “bad intelligence” that has cost trillions of dollars and hundreds of thousands of precious lives?
b. If the Bankers are accused of Fraud, well, may we ask what exactly was the job of the Regulators and these high-powered Senate Committees? The man on the street entrusts his money to the Banking system under the hope that the elected officials and the Government will ensure sufficient checks and balances are in place to protect the common man’s assets and investments. If an entire Banking system is accused of colluding and committing fraud, were the Fed officials and the Senate Committee members living in Neverland, so as to miss a fraud of such diabolical proportions?? How come they missed what everybody seem to know about? Were they so obtuse?
To top it, all the talk that has been going around in Governments around the world today is “whom to blame”. Not ONE constructive step, ONE concrete measure to ensure that such debacles do not occur in the future. While some programs have been put in place to stem foreclosures, revive housing and enthuse spending etc, nobody has seen any constructive debate around any measures for Balance Sheet control of the Banks.
While muted, there are still a handful of CDO deals going around in the market. What are Governments going to do about situations where Banks don’t end up taking up a leverage upto 80X in the future! This has given rise to some fundamental questions about the Raison d’être of Banks, should they serve as catalysts for credit and trade or should they be on par with other commercial institutions that are “run for profit”?
If Governments would like the Banks to act as “for profit” institutions, given the delicate inter-twining of Banking institutions with the rest of the economic ecosystem, it is imperative to put in place a strengthened regulatory mechanism to control both “on balance sheet” and “off balance sheet” risks of the Banks. No point in opening up the Securitization market without any controls and blaming the participants for stupidity and imprudence!
I hope some sanity prevails in the Governments around the world to take some concrete and objective measures and they don’t end up administering some “Wild Wild West” style justice by playing a blame-game!
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030702846.html
Narayan Bharadwaj
There have been a number of high-profile trials where top executive have been placed before a jury (not of their peers, it must be said) and accused of various criminal offences. Some are purely technical offences created by the state’s regulatory authorities. The more interesting trials deal with issues of theft and fraud. The key difficulty in all these trials is not to prove that the acts and omissions of the accused caused loss or damage to others (the actus reus) but that the required second element to establishing criminal liability, the mens rea, was also present. In the case of theft, it is necessary to prove the mental element of dishonesty. So just when is a top CEO dishonest? If the business practices used were the norm and any other CEo would have done the same, why is this CEO dishonest. The culture sets the standard for a consistent test. If you do not want to apply a reasonable banker test (one of these nice rhetorical devices in there somewhere), which standard would you pick and why?
It is time to put speculative gamblers in corporate business to trial along side the so called regulatory authorities. To my view everybody knew what was happening in the world economies, property prices accross india in a span of couple of years went by almost 1000%, it is a fact known to everybody that neither the population nor the economies of the countries grew by 100%, look at the petroleum products prices, grew from 40 dollar to 150 dollar in a year ,despite increase produciton, means that the growth of the auto industries should have been phenominal…. Everybody knew what was going around was grossly exagerated .. so why only single out the banking bosses?? A lot of people were collectively responsible for it… The pundits of money business now think about a new invention…
Trouble is, you can’t put bankers on trial in the US because they broke no regulations. Given the near total absence of regulations in the US, how can any be broken?
You can thank Greenspan and Paulson for the absence of regulations.
UK and the Eurozone are better regulated I think. We are seeing some action at HBOS. It’s head of risk management was fired when he blew the whistle as early as 2005. Then CEO James Crosby is now under fire for that firing and had to resign as FSA chief last month. Investigation of RBS/ABN Amro may follow, I hope.
Chances of such a thing happening in the US? Nil, I think. The same guys who removed all regulations (Paulson / Giethner) are leading the rescue act now and are busy with the never-ending AIG bailout. No question of retribution here Phil.
Michael – the execution angle is interesting -:)
PF
Hi Kishore –
They last nationalized the banks 100 years’ ago to clean out the self-interest and re-install leadership which would run the system to help drive growth by managing credit effectively – and not just focus on making their next quartely numbers. There is a dire need to radically change the behaviour of banking leaders today and I see only two options:
1. Government needs to rip out the current leadership and put in fresh blood which will toe the line of freeing up credit, and also provisioning more effectively, or
2. Make some real examples of these executives who knew what they were doing and played the game. Not sure what else we can call this, but gross negligence. I don’t see many Doctors getting away with malpractice, so why not go after some of these guys?
And regarding Wall St: even now we need to stop these “investors” shorting the market with their speculative trading. Even after everything that has happened, Wall St continues to be plagued by this deregulated greed. Karl Marx must be turning in his grave…
PF
Earlier comments suggest that it might be difficult to take legal action against all but those cases involving the most serious allegations. However, that does not stop legitimate investigation to learn lessons, in the public interest and minimise the risks of recurrence, as far as possible.
It would need expert lawyers to advise on this subject and so far most have suggested that there appear to be limited, or no legal means of redress against some of the former banking executives, that have been the subject of some the media reports in recent days in the UK. – To reclaim pensions, at least, as the UK government has indicated a desire and willingness to do, through legal means, if necessary.
There were indications for some while before the crisis broke with the credit crunch in August 2007, that there were problems in the US housing market; through media reports, including in the UK throughout 2006. What did the officers responsible for the Banks do during that time to assess their risks and potential exposure in this area, what provisions were made in the end of year financial statements? Both UK banks with US subsidiaries and US banks must have held data about the US housing market in 2006.
Some prominent economists warned of the potential, or possibility of a recession, as long ago as the autumn of 2006. What mitigating actions were taken and when and by whom at the banks?
When did the banks’ own liquidity ratio measures of total debts outstanding to current assets tell the senior officers that their levels of corporate financial risk; measured by liquidity were increasing? Did these risk ratios suddenly grow overnight, or was this a gradual development over the whole housing boom? Were these increasing risks reported to and discussed at banking board meetings?
The public bodies with the power to investigate these matters should be turning their attention to these points amongst many more.
Jonathan Harris
Phil,
On Monday evening, March 2nd, there was an interesting documentary about RBS on the BBC that tackled your question.
RBS has stated in a prospectus for the US for instance that they had performed sufficient risk analysis and due diligence … while an insider told the BBC that this was certainly not true … on the basis of this US lawyers are working on a case …
You can hear the statement that the RBS ‘culture’ called people who reported risks were called ‘people from the business prevention department’. So can you convict top managers who create a culture of ‘hushing up risks’.
A former FSA SFO member stated that “if you expect CEO’s from banks going to jail for 50 years … then you will be dissappointed …’
I am working on dynamic risk management (in a corporate strategy context) which includes the ‘human factor’. In that sense these are exciting times …
Eric Van Wetering
Too bloody right – thanks for voicing up here Phil. Some of these executives are criminals who knowingly hushed-up billions in toxic loans for their own fat bonuses. I am hopeful that when the banking system crawls out of this mess we will see many of these thieves get brought to trial. They nearly bankrupted the whole country. Enron is nothing compared to this fraud.
I’d agree with another post – it’s time to put the banking system on trial.
In the US at least, what fueled this mess, in addition to bad management practices, was simply a lack of legislative safeguards and enforcement of existing laws. In addition, there’s no legislative framework in place that allows the government to go in and clean up banks and financial institutions – they can either throw money (bailouts) at them or stand back and watch them fail.
I’d recommend listening to a recent broadcast of “This American Life” (on the page below, it’s episode number 375 from 2/27/2009 called “Bad Bank”). It’s probably the best explanation of the economic crisis in terms that the average person can understand:
http://www.thisamericanlife.org/radio_archive.aspx
These criminals should be hung from the highest yardarm. Failure of this extent in any other walk of life would yield expulsion from respectability from society. Why aren’t they fired at the very least, because there failure represents a complete failure in leadership? Simple, they are in “bed with the rascals”. Why does a man go to prison for having the disease of drug addiction but another can walk free for the disease of greed? Which is more egregious to society. Which is easier to cure.
It is no surprise. The stock market continues to decline. Confidence in global markets subside because leadership hasn’t changed, despite the mishandling of OUR assets. This is my retirement, your retirement, our children’s retirement. Anyone else would have been indicted for theft or embezzlement. Why not them? Influence and money, pure and simple. When is the public going to rise up and demand justice and equality.
Never………..! We are lemmings awaiting the slaughter…..We shall be assimilaited…. Resistance is futile.
Michael Meissner
Yes, definitely — but only if the CongressCritters who stipulated that banks must accept these ridiculous loans from people who could not afford them also join the bankers in the dock.
It is rich of the politicians to play hi-and-mighty on this issue: they created it!
Certainly, banking executives have had a big share in the miserable state our economies are in. However, I would also like to draw your attention to the Shareholder Value (SV) concept that could be the basis of the financial crisis. SV has been the main driver both for institutional and private investors for the last two or three decades.
SV overexposure has led to bad management across many companies in the world. Examples are CEOs whose only assignment was to take company’s stocks skyhigh, thereby using all kinds of means to move up stocks, such as layoffs at times when good profits were generated. All of this we have seen before and it was all for the sake of Shareholder Value.
What’s the alternative? I think that SV should disappear as the main business driver. It leads to short-term thinking and risky behaviour. Most CEOs have a 3 to 5 year timeframe and if they don’t succeed in raising their stocks, they loose out themselves.
So where do we go from here? We might think of a Shareholder Value model that is Stakeholder Value driven, which could be composed of the value a company gets through its internal (employees) and external (clients, suppliers) environment.
The world is ready for a radical change in valueing stocks and companies. Some analysts claim that within the next 12 to 18 months stock values might drop to 50% of current values.
So, comparing highest stock level (year 2000 before the internet bibble exploded) to the lowest level (2010? 2011?), what did Shareholder Value eventually resulted in, apart from sleepless nights?