Banking Scandalz

Do you know what popped into my head as I read the latest blog-post by Philip Boucher-Hayes ("PBH")?

Of course you do: it was the argument that is always made when the pay and conditions of teachers comes up on talk-radio

They are all underworked and overpaid because I know a teacher who just reads the paper all day/can't control the class/never corrects homework/comes in drunk etc etc

Fire those teachers, I say ! And then discuss what teachers worthy of employment should be paid.

So, up rocks PBH - I am out on a linguistic limb here; it means "PBH comes along", I think - to suggest that all bankers are evil because ... well, he has a list of credible accusations against a number of banks and bankers around the world. He and I had a little back-and-forth about this on Twitter, in which I wondered if any of the stories came to more than a hill of beans. He answered that many actually involved regulators extorting extracting large amounts of money in penalties from banks.

Parenthetically, I often marvel at the respect that court decisions or regulatory actions attract when the results line up with the zeitgeist. Out-of-touch judges and clueless regulators magically, when criticising popular targets and/or imposing penalties upon them, become not just excellent but infallible.

The catalogue of scandalous conduct laid out by PBH is impressive, so much so that in several cases it seems to me that it would merit the loss of banking licences. Why hasn't it ?

I am much too modest to suggest that I know the answer, but it seems to me that there several fairly plausible possibilities.

1. The conduct alleged never took place, or was less serious than alleged
2. It may have indeed taken place, but the proof is unavailable
3. Credible scapegoats were found and dismissed e.g. Bob Diamond of Barclays. (Note that they may or may not have been the true culprits)
4. It may still happen

"Wait", you say. "Are you not forgetting that many banks have already been fined huge amounts ? This proves that the allegations are no mere flights of fancy; they have in fact been proved beyond reasonable doubt, as you lawyers say".

Well, I am not familiar with all the cases involved, but of course it is not my intention to suggest that no bank ever grossly misbehaves. The manipulation of LIBOR, even if the effect on any customer, when there has been any at all, has been exaggerated, was appalling, for example. But I do not accept that all of these allegations have been proven beyond reasonable doubt, or even to the less demanding standard of proof viz. on the balance of probabilities.

Charles Kickham on Debt Defaulters

Writing to a friend in 1881, Kickham, Chairman of the Irish Republican Brotherhood (better known as "the Fenians"):

Apropos of the banks - the Irish World wants to abolish credit - no power to recover debts, no interest, no gold or silver currency, merely green-backs issued by the State.

Some may think that this reform may be helped in Ireland by the refusal to pay debts. But people who refuse to pay lawful debts next take what they want. The law that is prevailing in the case of debts will be equally so a case of robbery.

'Tis no joke to appeal to the lower instincts of an enslaved people. That's what these Land agitators have been doing all along.

Disclosure: Kickham was a cousin of one of my great-great-grandfathers.

On "Getting Away With It"

Any resemblance of any hypothetical characters mentioned hereinafter to real persons, living or dead, is purely coincidental.

Consider this scenario:

It is a "stark and dormy" night. (Who said Bulwer-Lytton is forgotten ?) On an unlit road, a tanker's valve somehow spontaneously opens - nobody ever provides a satisfactory explanation as to how or why - and the road surface is soon covered in a black-ish, smelly, viscous liquid. Some minutes later, a motor-car encounters the liquid, the driver - whom I shall call Mr Cooper - loses control and a very nasty accident happens, resulting in several deaths.

Cooper survives, however.

Is he jailed ? Prosecuted ? Arrested, even ?

No. Instead, he lives on, a free man "without a (legal) stain on his character". As Pat Rabbitte once asked, though, is he happy ?

Many people consider this to be outrageous. Four years later, some - and not just the predictably ignorant or intemperate - still mutter about how "the crook got away with it" (and believe it).

Now, unless you are new here, you will not be surprised to learn that my natural inclination is to resist such talk. I will ask to know which crime the unfortunate Cooper is supposed to have committed, why his broken tail-light or out-of-date driving licence had anything to do with the tragedy, even though they were criminal offences - albeit very minor - and so on.

My guess is that, even if you did not "buy" similar arguments already made by me in this series, you might see some value in them in the context of the hypothetical Mr Cooper.

It's an interesting exercise to discuss - as I have done with some people - why "the Coopers" are likely to get more sympathy (and, in my view, more justice) than "the bankers". Let us not detain ourselves with that discussion now. (We can return to it if there is a desire to do so).

However, in this article, I am going to explore the other side of that argument.

Let's go back to Cooper, and make the picture painted of him a little less straightforward, and thus, arguably, more realistic.

Breathalysed at the scene, he tested positive and while the subsequent blood test showed the alcohol in his blood was well below illegal levels, it also showed traces of psychotropic substances. At the time, however, the law did not specifically make it a criminal offence to drive in this condition.

Police investigation also revealed that Cooper's vehicle had at least two tyres marginally "bald", and that he had almost certainly been both driving too fast for the conditions and, worse, had been doing so with a telephone clamped to an ear with one hand.

All that said, the police had no doubt that none of these circumstances contributed to the tragedy, in which Cooper lost not only his only two children but several close friends who happened to be on the road at the unfortunate time. Even if Cooper's vehicle had been in perfect condition, even if he had had no alcohol or other intoxicants in his blood, had had his licence up to date, and had been driving with perfect care and attention, the people would have all died anyway.

Despite these circumstances, should the police charge Cooper with DDCD ("dangerous driving causing death") or less serious offences under the Road Traffic Acts because, otherwise, he will "get away with it" ?

Am I alone in wondering how a man involved in such a horrific scenario will ever get over it ? To me, the question of him getting away with it is out of place.

I would like to hear from those with a contrary view.

(We are not going to detain ourselves at this point with exploration of the culpability of Lehman Brothers, the haulage firm which owned the oil-tanker - imagine that ! - or of any other dei ex this particular machina. But don't forget the disclaimer above.)

Carswell in 60 seconds

Simon will probably be able to digest this in a minute "flat", but no-one else should be upset if it takes them longer than that ! The title originally referred to how long my first draft took to sketch, but to finish it consumed much longer than 60 seconds.

Here is my reaction - it's not really a review - to Simon Carswell's Anglo Republic.

• The crux: Anglo directors were agreed in 2004 that the exposure to development property needed to be reduced sharply, but because the bank lending staff were "deal junkies", they ...just...couldn't
• Another explanation: Chairman Gerry Murphy said in 1995 that the aim was 30% p.a. growth. New C.E.O. David Drumm repeated this target in 2004! Large property deals were the most, um, effective route to this goal...and took the bank over the precipice
• Something that might surprise you #1: Seán FitzPatrick did not like 100% (LTV ratio) loans
• Quotation from FitzPatrick: "We never employed people to tell us why we shouldn't lend" - a bit of an exaggeration, but only a bit
• More crimes were committed during the final slide over the precipice than have previously been revealed
• As the growth "snow-balled", anything, including prudential procedures, that slowed loan approvals was characterised as "inefficient" and was dismantled, wholly or partially. Not a thought seems to have been given to macro issues of sensible lending - all "turnover vanity", little "profit sanity", so to speak. In time, no-one was left who was likely to shout "stop !" or even to hesitate to lend more
• Something that might surprise you #2: Anglo's expense ratio was only one-third of the industry average
• It is tempting to see Seán Quinn as the "real villain", but Anglo was "going down" even without his astonishing shenanigans
• Anglo - other Irish banks too - was full of people with business degrees who had trained as accountants (as opposed to bankers or economists) and who saw banking as "just selling money"
• In early 1990s, 90% of Anglo lending staff were ex-AIB
• Something that might surprise you #3: there was really no "special relationship" with Brian Cowen, or even with Fianna Fáil in general
• At least after the departure in 2005 of Tiarnan O'Mahoney, the funding discipline, such as it had been, disappeared
• The biggest omission from the book: there is no detail on how the loans to Mr FitzPatrick were actually approved e.g. who did the due diligence (if any) ?
• I was surprised at the description of personal guarantees as an "Anglo trademark". During my banking days, which ended in the mid-1980s, they were more associated with my employer, Industrial Credit Company (as it then was named). There was constant pressure on us to abandon the requirement, not just in individual cases but in principle, and by 1985 seeking them was much less prevalent as a practice. How did Anglo get away with it so easily ?
• Something that might surprise you #4: The Financial Regulator was not completely useless: at several points, he obliged Anglo to modify its behaviour

The reasons for Anglo's specific route to disaster viz.

1. the lenders' addiction to deals
2. the ludicrous growth ambitions
3. the weakness of the funding function
4. and (my own gloss) the overall shallowness of the corporate culture

prompt the (for me) obvious question to those directing the other banks, and especially AIB Group

What's your excuse ?

Boston vs. Berlin: "Blame-Game" Episode

Mary Harney, for good or ill one of the most influential figures in Ireland's political life over the last 30 years, said in a 2001 speech which is still debated

As Irish people our relationships with the United States and the European Union are complex. Geographically we are closer to Berlin than Boston. Spiritually we are probably a lot closer to Boston than Berlin.

Now, I offer you more grist to that particular mill.

"It's The Economy, Dummkopf"

In the latest entertaining (but, um, scatological) article by Michael Lewis for Vanity Fair entitled as above, our old friend gives us much interesting detail on cultural differences. Read the whole thing; there is more in it than I can possibly précis for you. However, partly but not entirely because of my current series of posts on a related theme, I found this observation especially interesting:

The American bond traders may have sunk their firms by turning a blind eye to the risks in the subprime-bond market, but they made a fortune for themselves in the bargain and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly $100,000 a year, with, at most, another $50,000 bonus. In general, German bankers were paid peanuts to run the risk that sank their banks—which suggests they really didn’t know what they were doing.

Reference to $150k p.a. as "peanuts" may be offensive to some, but in this context, is not hyperbolic: some American traders were paid millions, to sell what turned out to be "toxic" products, and for which in Lewis' telling, the less well-paid German fund-managers were actually the "ultimate patsies". He goes on:

But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former C.E.O. of IKB, Stefan Ortseifen*, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros.

The emphasis is the author's, who thereby reminds us of American financial entrepreneurs who have made more than $805 million from similar activities.

Ironic or .. ?

In summary, in "Boston" people made millions by selling toxic stuff to relatively underpaid, naive, people in "Berlin". The latter, arguably victims of a kind, are the ones threatened with jail. In Ireland, my impression is that those doing most of the similar threatening tend to be those on the "Boston" side of the debate.

*Mr Ortseifen was charged and convicted, not of "losing billions" (though his firm, Lewis says, did lose more than $15bn under his leadership), but for allegedly making a false statement to the market. The conviction looks rather unsafe to me (for whatever that is worth), and I understand that it is under appeal.

MOPE: "Most Oppressed Profession Ever" ?

In Ireland, the grievances of Northern nationalists have occasionally been exaggerated, leading to the derisive label of MOPE ("most oppressed people ever") being applied by some of the more cynical among us.

I am often reminded of this when reading the complaints of some independent financial advisers ("IFAs") in the United Kingdom. A current example is this article by Alan Lakey of Highclere Financial in Hemel Hempstead. Mr Lakey has been a vociferous critic of financial regulation for quite a while (at least 5 years, if I recall correctly), and there is much to criticise. As with the Northern Irish nationalists, the "hype" about the precarious position of IFAs reflects real grievances, not imaginary or invented ones.

However, in the recent article, Mr Lakey parades two "hoary old chestnuts" beloved of the "IFA community".

Expanding the Complaint

A big bone of contention is that

Unlike a court, the FOS is able to depart from the specific allegation being levelled and pick through the advice process looking for some aspect it does not like. This inquisitorial process often results in the original allegation being rejected but another, often disassociated matter, being used to uphold the complaint...Some of these are clearly vexatious or devoid of logic yet the FOS invariably accepts jurisdiction causing the adviser hours of unnecessary work, interaction with his PI insurer and, potentially, payment of a £500 case fee.

(Emphasis added by me)

This is based on a misconception of how judges - at least the better ones - deal with cases. Particularly with litigants-in-person, a judge will seek to be sure that s/he understands the real source of what has given rise to the proceedings. If that means permitting the claim to be amended, that will be done.

I would doubt that Mr Lakey could sustain his charge that vexatious, illogical claims are invariably added to original complaints, but I accept that when it does happen, as it probably does, it is not a nice experience, for the reasons mentioned by him, and others.

Limitation Rules -A Human Right

Another area causing outrage is ...[that the] FOS totally ignores the 15-year long stop.The lack of a long stop is the most emotive as it singles out our industry for a removal of human rights. No rationale is used for this confiscation of rights apart from some mumbling about the long-term nature of financial advice.

This is where Mr Lakey really "loses it" and loses me, too.

The idea that benefitting from the English (or any other) statutory rules on limitation could be regarded as a "human right" is - I cannot think of a more polite word - ridiculous. All limitation rules are inherently arbitrary and work a lot of injustice in themselves. (Sadly, that does not mean that we can do without them, but that's a story for another day). For that reason. presumably, they are restricted to "legal proceedings", and complaints to the FOS are not legal proceedings.

To put it another way, it is said that the limitation rules do not extinguish the right but merely remove the remedy of being able to sue (in court) to enforce the right.To my mind, it is entirely reasonable that the FOS, not least because of the very long-term nature of some financial-services contracts, should leave open the possibility of examining complaints about events older than the 15-year long-stop.

Naturally, to do that raises difficulties of evidence on all sides, and one would expect that the FOS would not neglect this. Nor should it fail to have regard to the normal legal approaches to protests by defendants that there has been unconscionable delay in making or pursuing a claim, and similar protests.

On the evidence point - which is normally the main difficulty - it is relevant to wonder, nearly a quarter-century after the 1988 Financial Services Act, whether it should not be severely embarrassing for the industry to be be still worried that its paperwork might not vindicate its position.

The Perils of a Solicitor's Undertaking

A recent decision by the Irish High Court (Peart J.) exposes some of the sloppy banking and legal practices which characterised the Madness, and have contributed to the scale of the crash. The case is remarkable in a number of ways and I may return to the sloppy practices on another occasion.

I will here confine myself to noting this summary by Peart J. - a former solicitor, be it noted ! - of how the court will approach an application to enforce a solicitor's undertaking:

In summary, the following principles emerge from the judgment of Laffoy J. and Geoghegan J. in Coleman, and the authorities considered therein:

1. The Court has an inherent jurisdiction in matters concerning the conduct of solicitors, being officers of the court, including but not confined to compliance with their undertakings.
2. It is both a punitive and compensatory jurisdiction.
3. It is discretionary and unfettered in nature requiring each case to be considered on its own facts and circumstances.
4. In its exercise, the Court is concerned to uphold the integrity of the system, and the highest standards of honourable behaviour by its officers - a standard higher than that required by law generally.
5. The order made by the Court can take whatever form best serves the interests of justice between the parties.
6. In the matter of undertakings, the Court must consider the entire undertaking in order to reach a conclusion as to its real ultimate purpose.
7. The Court may order compliance with the undertaking, though late, where there remains a reasonable possibility of so doing.
8. Even where the undertaking may still be complied with, the Court may nevertheless order the solicitor to make good any loss actually occasioned by the breach of undertaking, which may or may not be the entire of the sum which was the subject of the undertaking.
9. Where compliance is not possible to achieve by the time the Court is deciding what order to make, if any, it may order the solicitor to make good any loss actually occasioned by the breach of undertaking.
10. Carelessness or other form of negligence on the part of the person affected by the undertaking, and in relation to the matter the subject thereof, may be a factor which the Court will have regard to when determining what order may be fair and just.
11. Any order the Court may make ought not be oppressive on the solicitor. Nevertheless, gross carelessness or other conduct considered sufficiently egregious by the Court, though falling short of criminal behaviour or even professional misconduct, will entitle the Court, should it consider it just to do so, to order payment of the entire sum which was the subject of the undertaking, and not simply a lesser sum in respect of loss actually occasioned by the breach of undertaking.

To these statements of principle which I perceive to emerge from Coleman and the other cases referred to therein, I would add one other which is linked in a way to that at 11 above.

It is this. It seems to me that the special supervisory jurisdiction being exercised by the Court in these matters is not unlike an equitable jurisdiction, given the wide discretionary nature thereof, and its objective of ensuring that justice is done between the parties in a broad sense.

In my view, therefore, it seems to me that it is not inappropriate or otherwise wrong for this Court to have regard to the overall behaviour of the solicitor, somewhat akin to seeing whether a person who is claiming an equitable relief has come to court with clean hands, even where the undertaking may be still reasonably capable of being completed, and even where the loss actually occasioned and sustained by the claimant may be less than the entire sum which was the subject of the undertaking.

The Court went on to order that the firm of solicitors should pay over to the bank the entire amount of the loan (€3m) plus interest and costs. This was approximately €1 million more than it would cost to belatedly comply with the undertaking.

Now, that's what I call "non-oppression".

Update on Saturday, March 6, 2010 at 09:01PM by Fergus O'Rourke

(This is my second attempt to publish this follow-up; I was unaware that the first attempt, made almost exactly 24 hours ago, was unsuccessful, for mysterious reasons, until a few minutes ago).

In relation to the "oppression" point, it should be pointed out that, under the option suggested by the solicitors but rejected by the court, the bank, instead of getting its €3 million back with interest, would have been provided with security worth about €0.6 million.

Update on Friday, June 29, 2012 at 07:09AM by Fergus O'Rourke

This decision by the High Court (McGovern J.) - though the circumstances are very different - is another example of how expensive failures to comply with undertakings can be. (A hat-tip to Mark Tottenham at Stare Decisis Hibernia for this, and much else).

Update on Friday, November 8, 2013 at 10:19AM by Fergus O'Rourke

The case citation links in this post have now been repaired.

What'd You Expect ? You Left the Keys in the Car

You leave your house to go to work. You get into the car, start the engine and then realise that your windscreen is covered in frost. You jump out, run into the house to get some water, knock down your small child and have to console her. When you emerge again, still only 5 minutes later, your vehicle has been stolen.

Your insurer says that it will not cover your loss, as you left the vehicle "unlocked and unattended" and with the keys "in or on" it. You therefore failed to take "reasonable care" of your property, and you cannot expect the insurance company to pay for that.

It's obvious, no ?

Well, no it isn't,as the UK's Financial Ombudsman Service make clear here.

Update on Tuesday, October 29, 2013 at 01:03PM by Fergus O'Rourke

Link to Financial Ombudsman now restored

An End to Imprisonment for Debt ?

In a note written in 2006 (you'll find it here) I confidently asserted

No-one in Ireland goes to prison because they cannot pay a debt

Though correct as to the position in law, arguably I was wrong because of the failure to observe due process by some judges.

Earlier this year, it was reported that the relevant legislation was to be challenged on constitutional grounds, with the Irish Human Rights Commission supporting the challenge.

A decision reported in "The Irish Times" this morning (See follow-up note dated 26 October 2013 below) suggests that this may not be necessary.

The report is, as is normal, written for the general audience and is not necessarily complete as to what lawyers would regard as the relevant details, or the detailed ratio decidendi. (I note that Eoin O'Dell has recently repeated his criticism of the delay in publishing the full judgments of the Irish superior courts.) That said, O'Neill J.'s decision as reported seems to me to admirably set out the standards which ought to apply when a creditor applies to a court to have someone imprisoned for failure to pay.

(As an aside: why are so many of the cases which get publicity initiated by credit unions ? Does it reflect sub-normal attention to public relations ?)

Note that a failure to pay by itself is not a ground for such an application: the failure must be to comply with a previous order by the court that the debtor pay a specific amount. Now, it may not be generally realised, but in Ireland, when such a failure occurs, the creditor may realistically have very little legal option but to apply for such an order, even if putting the debtor in prison is of no use, and indeed may be counter-productive. The creditor may not be unreasonable in believing that to apply is the only way to get the debtor's attention.

However, this is by no means always the explanation for the application, or if it is, something is going wrong on a regular basis, because yesterday's case, as well as the case referenced here (and here), all appear to be cases of "can't pay" rather than "won't pay". In all of the latter cases, and, I suspect, in virtually all cases of this kind, the debtor has failed to turn up in court, or, as it is often censoriously expressed, has ignored the summons to attend.

Judges are invariably wont to take umbrage at this, and my sympathy for debtors notwithstanding, I tend to agree with this, at least up to a point. I cannot agree, though, that, as has happened, it is appropriate to sentence someone - in absentia - to prison for up to three months because the judge is annoyed with failure to turn up.

It appears likely, as well, that creditors are either encouraging judges to do this, or failing to suggest more suitable alternatives such as adjournments.

Presumably encouraged by Conor Devally S.C., the debtor's counsel, O'Neill J. has now made such inappropriate happenings much more unlikely, if not completely impossible, by interpreting section 6 of The Enforcement of Court Orders Act,1940 in a new way.

The said Section 6 reads as follows

• ( a ) where a debtor is liable, by virtue of an instalment order, to pay a debt and costs either in one payment or by instalments and such debtor fails to make such payment or fails to pay any one or more of such instalments accruing due while such order is in force at the time or times appointed in that behalf by such order, the creditor may, at any time while such order is in force or within twelve months after it has ceased to be in force, apply to a Justice of the District Court for the arrest and imprisonment of such debtor;
• (b) on the hearing of an application under the next preceding paragraph of this section, the Justice may, if he so thinks proper but subject to the next following paragraph of this section, order the arrest and imprisonment of the debtor for any period not exceeding three months, and thereupon the debtor shall be arrested and imprisoned accordingly;
• ( c ) the Justice shall not order the arrest and imprisonment of the debtor under the next preceding paragraph of this section if the debtor (if he appears) shows, to the satisfaction of such Justice, that his failure to pay was due neither to his wilful refusal nor to his culpable neglect;
• ( d ) on the hearing of an application under paragraph (a) of this section, the Justice, if he so thinks proper, may, in lieu of ordering the arrest and imprisonment of the debtor, treat such application as an application under the next preceding section of this Act for the variation of the said instalment order and thereupon the said next preceding section shall apply as if such application were an application thereunder;

O'Neill J. appears to have decided that section 6(c) may not be interpreted so as to place the onus on the debtor to satisfy the court as to his or her inability, as has been the practice - in accordance, to be fair, with the most obvious meaning of the words - but that it must be shown beyond reasonable doubt that s/he is either wilfully refusing, or is culpably neglecting, to pay. This, the standard of proof in criminal cases, is appropriate because the criminal sanction of imprisonment is involved.

Update on Saturday, October 26, 2013 at 09:51AM by Fergus O'Rourke

Unfortunately, I can no longer find the original 2009 links, but for those seeking more detail this one and this will, I think, prove useful further reading