Why They Should Not Be Arrested - Part 10 (Final)

This series was written in reaction to the repeated suggestions - the flow of which has barely abated over the nearly two years since the series started - that the Irish banking disaster was the result of criminal activity. These suggestions have substantial emotional weight, but little else. (No, the almost universally misunderstood and massively over-interpreted "Anglo Tapes" do not affect this conclusion).

Our society is, however imperfectly, one which is governed by the Rule of Law. This is a good thing, because the alternative is government without defined formal rules. In the absence of such rules, government is dictatorship: s/he who has power will do whatever s/he wishes.

It is really quite extraordinary that so many people, including lawyers, while quite convinced that a myriad of criminal offences caused the banking disaster, are utterly unable to name a single one of those supposed crimes, even in private. In private, and sometimes in public, they will blithely recite the names of the alleged criminals, but cannot associate an alleged crime with any of them ! Pressed, the words "Madoff", "Iceland", and sometimes even "Mozilo" come up, but misdeeds comparable to any of those have not been exposed in Ireland (and Madoff was not a banker).

Of course, crimes *did* occur (this, for example), and were not beneficial, but they were not significant contributors to the collapse. Lurid tales of misbehaviour also circulate, but where they are credible, the behaviour was not criminal, and where the misconduct alleged is of a criminal character, the evidence is not credible. Maybe, credible evidence will emerge some day, but after five years, many enquiries, formal and informal, and my own challenge, I trust that you will appreciate why I am now extremely sceptical.

Indeed, I am forced to conclude that the calls for bankers to be jailed are entirely emotional in nature. While the emotion is understandable when the damage is so enormous, as a guide to action, it is no substitute for rational consideration of the facts. When a loved one is killed in a road traffic accident, it is natural that we react by seeking someone to blame, and, if any plausible culprit is identifiable, it is commonly difficult to avoid being led by our emotions into the belief that s/he is guilty of murder.

However, history tells us that this way injustice lies, and this is bad for everyone. Remember the Guildford Four and the rest ?

And so to finally close this series, I reiterate that they should not be arrested because

1. No unconvicted person should be arrested ever unless, and to the extent that, it is necessary in order to ensure that they turn up for a trial. Arresting "for questioning" is just an unpleasant relic of the "Dark Ages", whose effect - and often its purpose - is to smear the person arrested and/or to intimidate or entrap him into a confession, false or otherwise
2. However, even if the question is "should they be imprisoned ?", I still say not, until or unless something new turns up.
3. "Something new" means an actual crime known to the law with which they could be charged, tried and, if convicted, sentenced.

That does not mean that they should get away with it altogether, but let's be clear what "it" is.

Imprisonment is what happens to people who have been convicted at the end of a process which starts with the laying of a charge. The charge will name the accused, describe his or her behaviour and assert that this behaviour was a breach of a very specific provision of the criminal law. Evidence is then produced and tested, the law is applied to the evidence, and a jury decides if the accused is guilty as charged. Until a jury does so decide in any person's case, that person is entitled to the presumption of innocence. Note also that, even if a jury does declare him or her guilty, the guilt is not comprehensive - the person is convicted of a specific charge, not of every crime committed by everyone who ever lived.

Contrary to a popular meme, the population is not divided into a huge law-abiding majority and a minority of evil people who only occasionally get caught. The truth is that probably every citizen regularly - but usually unconsciously - breaks some provision of the criminal law with impunity.

In the case of the Irish bankers, while I am now very sceptical of their guilt of relevant criminal offences, I remain of the belief that the law applicable to directors of failed enterprises should take its course, and I will refer you again to the Open Letter in this connection.

Note: I am not arguing for or against the idea that Seán FitzPatrick or his co-defendants, if convicted, should be imprisoned. My position, based on current information, is that their alleged crimes did not cause the banking disaster. This series only concerns itself with conduct that led to that event.

Why They Should Not Be Arrested - Pt 9

So, Do They Just Get Away With It ?

Even if I am right, and, as I have argued in earlier articles in this series, criminal offences did not cause the Irish banking disaster, it does not follow that no-one was "to blame".

In case anyone is still unclear, my view is that those responsible for the disaster, were indeed, mainly, those in charge of our banks. And that it was the lending of money badly which was the crucial fault. I am also of the opinion that, although their failings were not "criminal" in terms of the law as it is (or was), they should have been, and that such conduct should be criminalised for the future without delay. I note that the redoubtable Nassim Nicholas Taleb suggests that the old rule of a death penalty might be revived for similar offences. I am not sure if I fully agree, but I like the thinking.

However, in terms of the law as it is, rather than it might be, my view is that the criminal law is not likely to be useful. What of civil remedies ? I will now examine this question under four headings.

one

One route would be to examine contracts of employment, establish what contractual duties - whether express or implied - applied to the most senior individuals and try to see whether there had been any breaches of duty by them. Unfortunately, the contracts are not in the public domain, and I have no reliable information concerning their terms. Were I an employment lawyer, I might speculate as to possible avenues of liability, but alas ! I do not have that expertise. Any lawyers reading this who might have something useful to say about this are hereby invited to do so. For whatever little that it is worth, my unreliable information about the terms of the relevant contracts is that there is no scope under them to impose a liability on any officer or employee who might be of interest in this connection.

two

It more or less automatically follows that the pension entitlements do not offer much help, either: if it is not legitimate to reclaim salary, why would it be just to reduce pension payments ? There is one exception - at least at the level of principle - to this, however, which is highlighted by the case of Eugene Sheehy, the former Chief Executive of AIB Bank. Mr Sheehy's pension entitlements, like those of all AIB pensioners, are a liability of the pension scheme, which is a separate legal entity, rather than of the bank. The Bank's multi-billion euro losses do not affect the value of the scheme, except to the extent (limited) that the scheme invested in bank shares, but the scheme does rely on continuing support from the bank as sponsoring employer, both to maintain the contributions for continuing employees of the bank, and to "top-up" the scheme funds if their value falls, or fails to keep up with the pension promises made.

Unsurprisingly, the latter circumstance has occurred, as it has for virtually every scheme. AIB injected approximately €1 billion, I understand, into the pension scheme to keep it solvent. The bank, unless it restructured its pension obligations, really had to do this, but taxpayers can feel justifiably aggrieved that some of their money was used in this way. They can also legitimately ask just why the alternative of a restructuring of the bank's pension obligations was not chosen.

Mr Sheehy, to his credit, shortly afterwards disclosed that he was waiving part of his pension entitlement. It is hardly unfair or far-fetched to suggest that there may be others who should do the same.

three

Where a company has been put into liquidation, a number of options for action against those in charge who may have behaved with insufficient probity or competence become available. For example, the issue of reckless trading becomes something which the Liquidator can explore. Also, unless the Office of the Director of Corporate Enforcement deems it inappropriate, the Liquidator must apply to the High Court for an order restricting all directors from acting as company directors for five years. Such orders are not made automatically by the court, and are arguably not very onerous for many of those affected, but when contrasted with what most bank directors have faced, those affected may feel "hard done-by".

Now that Anglo-Irish Bank has finally been put into liquidation, I expect to see proceedings against directors by the Liquidators, and indeed some hints of this have already appeared in the media.

four

The only other useful legal recourse is the one proposed by us (Karl Deeter, multiple signatories and I) here. Just after we published, a UK parliamentary committee report led to similar proposals there. (Ireland's own parliamentary inquiry is still stalled; despite a fine and comprehensive preparatory report, the latest indications are that it will focus exclusively on how the infamous Guarantee was decided).

Update on Sunday, May 19, 2013 at 01:06PM by Fergus O'Rourke

I note from a recent article addressing this issue in "The Economist" that

Policymakers have proposed introducing a “rebuttable presumption” that the directors of a failed bank should be automatically barred from running another unless they could prove they weren’t at fault.

Why They Should Not Be Arrested - Pt 8

This post is one of a 10-part series of posts, the rest of which can be seen here.

In this post, I shall address some issues which have been raised by comments made (on this site, Twitter and elsewhere) querying my overall thesis.

Common-Law Crimes

A "common-law crime" is one which was not voted into existence by the legislature. Many things have been recognised to be criminal for thousands of years. For example, murder, rape and theft were all recognised by the police and by the courts as crimes, even before statute law (that is, laws enacted by our elected representatives) defined and refined the details.

It has been suggested by Fintan O'Toole of The Irish Times, for one, that what caused the insolvency of our banks was the commission of common-law crimes by bankers. He refers favourably to what happened in the case of The City of Glasgow Bank, implicitly suggesting that that case showed "just how it should be done" if our justice system would only work as well as did, notoriously, that of 19th century Scotland, oh yeah !

Well, I have seen no evidence that similar behaviour occurred in our own recent disaster, but if it had, the perpetrators could be charged, not with such common-law crimes, but with crimes which have now, like murder, been defined by the legislature.

In any case, the City of Glasgow situation was in hardly any way comparable: only the shareholders lost money.

Finally, I know of no (other) common-law crime which applies to the behaviour of those who are responsible for our banks' failures.

Unjust Enrichment

There is no crime of "unjust enrichment" known to Irish Law. I am not even aware of it being a crime in other jurisdictions.

There is a tort (meaning a civil wrong) of that name. It describes the situation where, for example, you give me a €50 note thinking it to be €20. I do not notice, but may have been "unjustly enriched" by €30. You may be able to sue me for the return of the €30 - good luck with that ! - but there is no question of my being punished for what happened.

It might just be possible that some of those responsible for the banking mess might need to be nervous about this. To be clear, though, they may worry about having to return money received, not about being arrested or imprisoned.

"General Criminality"

This is the most common objection to my thesis, if hardly the most compelling.

What is said is that our "top bankers" were all obviously up to their necks in "blatant criminality", by which it is meant that they disregarded all constraints of law to indulge their greed. I have even been assured, by intelligent people educated to third level, that said bankers knew what they were doing and were determined to ruin their banks and the Irish economy so that their own wealth would be maximised.

Challenged to justify this belief, they will cite the revelations about the behaviour inside Anglo-Irish Bank during 2008, but are unable to explain why, if both Seán FitzPatrick and David Drumm are now bankrupt, wealth maximisation was going on.

I see no evidence of this alleged "widespread criminality". Greed is not a crime.

What happened during 2008 was not a cause of the crash, but a desperate attempt to avoid it.

Recklessness

Almost as common as the last, this concept is mentioned often, and appropriately so, in my opinion.

There is no general crime of recklessness, or even of gross negligence, in Irish Law. (There are road traffic offences which amount to the same thing, but prosecuting for lending "carelessly" "without due care and attention" or "dangerously" under the Road Traffic Acts are not viable options).

Now, Irish law does recognise a crime of "reckless trading" (Companies Acts, section 297A). Prosecutions of this can only take place if the accused was a director of a failed company (meaning one in examinership, or liquidation).

Because of the way in which the failure of the Irish banks has been handled (even Anglo is not a "failed company" in the above sense), technically the crime does not apply. I will discuss this further in the next part of this series of articles. For now, I will say two things about it.

First, I do not believe that the authorities had that legal position in mind when they chose to proceed as they did, but anyone of another mind is welcome to try to change mine.

Secondly, I cannot resist reminding you that I asked for a mandate from the electorate last year to make "reckless lending" a crime in itself, but there was little interest from voters and none from commentators.

Coming Soon

Part 9, in which I (attempt to) answer the question

So, they just get away with it, do they ?

Why They Should Not Be Arrested - Pt 7

This post is nearly the last of a 10-part series of posts, the rest of which can be seen here.

Given the title of this series of posts, it is long past time for me to state a premise of my position - one that may surprise some readers:

• I believe that we should forget about "arresting people" altogether.

• Even if there are good reasons for believing that someone is guilty of crimes, to arrest him (no female suspects have been mentioned to me) is the wrong thing to do

• The correct thing is to charge him with the crimes, give him a fair trial and, if found guilty, sentence him

• All of that can be done without an arrest, unless the sentence includes a term of imprisonment

Outside the context of police catching people in the act of crime, arrest is an abuse of state power.

"It's a free country", people sometimes say. One of the characteristics of that freedom is that people can only be deprived of their liberty after what the Americans call "due process" has been followed. (It is an American phrase, perhaps, but not a peculiarly, or even originally, American idea - it's in clause 29 of Magna Carta all the way back in 1215, for example).

Forget about what you see and hear on television, and what you hear from your friends. Why are police forces so keen on arresting people and holding them for as long as possible without charge ? After all, the right to silence means that prisoners have no obligation to tell their captors anything, and are best advised to tell them nothing. (It amazes me that well-educated people - even, more shockingly, lawyers - complain about prisoners who "select a point on the wall and stare fixedly at it, for days on end, refusing to say anything".)

Why should he do anything else ? The prisoner is warned that anything said by him may be recorded and "used in evidence against him". Note that he is not promised that things he may say can be used for his defence. Note also that his interrogators may lie to him without penalty, while if he lies to them, or even makes an honest error, it may "hang him".

I am afraid that the reason why police like to arrest suspects and hold them as long as possible before charging them is so that the prisoners can be intimidated and the hope is that the process will result in a confession.

"But", you object, "if police cannot arrest and interrogate people, how can culprits ever be discovered and punished ?"

This is a common view, and a fairly natural one, but it overlooks some rather obvious points:

1. It is based on the presumption that confessions are both quite common and perfectly acceptable. I do not suggest that a confession is never satisfactory, but a system which excessively relies on confessions is asking for trouble.It gives incentives to police to mis-behave (see below for examples of where that happened).

2. It is much safer to use testimony from people other than the accused

3. There is no need to arrest someone, whether s/he be a suspect or not, in order to interview them. Indeed, the police ordinarily have no legal power to arrest people simply to question them.

4. Interviews, whether of someone expected ultimately to be charged or not, may take place anywhere, not just in police stations.

Have we forgotten so quickly about The Birmingham 6, The Guildford 4 or even the Dean Lyons case ? If so, I recommend that you just read John Grisham's "The Confession" - it may be fiction but people who know about these things will tell you that it is very true to life.

Why They Should Not Be Arrested - Pt 6

In part 5, I discussed criminal liability and promised to mention the other types of legal liability. That I now do.

To repeat: only if a crime is involved does the possibility of arrest or imprisonment arise.

Other important differences between criminal and civil law remedies are:

• Jury trial: Except for minor crimes,trial is by jury. The only non-criminal cases triable by jury relate to defamation
• Standard of proof: To be guilty of a crime, the evidence must be found to show guilt beyond reasonable doubt (sometimes abbreviated to BRD). In non-criminal cases, the standard is much less demanding: the balance of probabilities, which means that something has to be shown to be more than 50% likely to be true. Yes, 50.1% is enough.
• No police:The police will not be involved in a civil case, except as individuals, or as members of an organisation like any other
• Not about "guilt":Civil trials do not deal in guilt, they deal with liability (to pay, usually) or to resolve conflicts over e.g. planning issues.

In the context of Ireland's banking crisis, some form of (civil) legal liability may arise for consideration under the following headings :

• Negligence - or, in plainer language, carelessness. It may be that some bankers failed in duties of care to their employers, to customers or to outsiders. Other than New Beginning, who indeed have had little enough success (as they warned was probable), there is little or no sign of people making such claims in the courts, even as defences when banks sue them
• Restitution/unjust enrichment - if I give you €50 and we both, for some reason, mistakenly think that I have only given you back the tenner I borrowed yesterday, the law says that you have been unjustly enriched. (That does not necessarily mean that the law will oblige you to give me €40 in restitution: if you discover the extra money without realising how you got it and buy drinks for all around, for example.) However, if I sell you a house whose real value is €100,000 for €200,000, the law does not recognise it as unjust enrichment
• Contract - for instance, if in return for their bonuses some bankers promised specific things which they have not delivered. I am unaware if this is a possibility - it seems unlikely that such issues could remain hidden for long. And, yes, this indicates more incompetence, in that clearly at least some bonuses were paid to those who steered the institutions "onto the rocks"
• Deceit/fraud - yes, this can be a civil matter as well. I await examples.

The End

We are now approaching the end of this series of posts.

The final substantive part (no.9) will answer the question

So, they just get away with it, do they ?

and the absolute last part will be a summary of the series.

Before we get to those last two, there will be a short digression on the subject of "arrest", and part 8 will address some issues that have been raised by readers.

Still Not in Favour of Gaol, But...

I here digress (again) from my apparently interminable series on Why They Should Not be Arrested - it hasn't gone away, you know (it's here) - to take a slightly different line on a related issue

Kieran McGowan is a 67-year old executive with an impressive record of success. I don't know him, but I would say that he is very well regarded in Ireland's business/professional community. His position as Chairman of the board at Ireland's most successful indigenous company, the multi-national building materials group CRH testifies more reliably to that than anything I can add. While I cannot forbear to express my opinions on his recently published views, nothing that follows below is intended to impugn the reputation that he has earned.

In Friday's "Irish Times", an interview (by Simon Carswell - yes, that Simon Carswell ) with Mr McGowan was published. The interview covered in part his time as a director of Ireland's largest home-mortgage provider, Irish Life & Permanent group ("ILP").

The group, product of a merger of two lending institutions (TSB and Irish Permanent) with a life & pensions group (Irish Life), is now effectively nationalised (though I seem to recall that there are legal issues with finalising that process). As may be gathered, I have not been paying it much attention, for reasons too detailed to recount just now. Suffice it to say that I have not regarded PTSB (ILP's banking arm) as the worst horror story of the banking sector.

The interview was significant in that, brief though it was, it is only the third public account that I have seen from one of those people who were "on deck when the iceberg hit" in 2008. (The first was Jim O'Leary's(PDF), of which, having just now re-read it, I have to say that it deserves a lot more respect and attention from all of us. The second was "The FitzPatrick Tapes".).

I wish to highlight three points from Mr McGowan's interview

1. They Couldn't Say No

   The introduction of 100% LTV home mortgages to the Irish market by Ulster Bank (part of the RBS group) was apparently greeted with horror by all at PTSB. However horrified, though, they were too fond of market share not to "join the fun". I am reminded of what I have described here as "the crux" of the Anglo story, but also of Chuck Prince's notorious dictum "as long as the music is playing, you’ve got to get up and dance".

   Consideration of this almost makes me want to change my tune on jailing the bankers.

   Imagine a trading company board member confessing after its collapse that he had presided over a policy of losing money in order to keep market share. Did these people never hear of "Turnover is vanity, profit is sanity" ? Is it what the Companies Act 1990 calls being "responsible" ?

2. Mr McGowan agrees that the PTSB decision to put market-share before prudent lending was not a good thing.(Wow !). Indeed, he confirms - I, at least, never doubted it - that the upper echelons of the bank were very perturbed about it.

   What is amazing is that he apparently still thinks that complaining to the Financial Regulator and/or to the Government was somehow an adequate discharge of their duties.

   This view, which was by no means unique either to Mr McGowan or to PTSB, clearly points up the phenomenon of infantilism by regulation. In other words, many otherwise adult bank directors thought - I hope that they no longer do - that it was someone else's job to stop them from destroying their own institutions by imprudent lending.

3. Again echoing other bank directors and executives, Mr McGowan (per Simon C.), said the bank could not attract deposits at the same rate that it was growing its loans and that this meant borrowing heavily in the international bond markets.

   "I never thought, to be honest, that wholesale lending would just come to an abrupt stop like that. In all fairness, I don't think too many people did because it was the way the world was,"

   Let me make two observations about that.

   First, I would like to know about the decision-making which led to PTSB becoming, like Northern Rock, over-dependent on the wholesale markets. Was it again an obsession with preserving its market-share ?

   Secondly, one can certainly be somewhat indulgent of a non-banker like Mr McGowan in this regard, but I find it very difficult to excuse the banking industry generally for complacency about the risks of a credit-crunch even before Northern Rock. I wonder what an examination of PTSB's activity after Northern Rock's demise in August 2007 would tell us about the ability of its guiding lights' to see clearly.

Nothing that Mr McGowan or anyone else has said seems to me to come very close to suggesting that bank directors committed criminal offences while "steering their ships over the waterfall". However, discussion - which will resume before long in my above-referenced series - of their culpability or otherwise need not be limited to the question of criminal sanctions.

Why They Should Not Be Arrested - Pt.5

In this post, I will discuss the meaning of criminal guilt, why it is often difficult to find, and why it is not the same as responsibility/ culpability/ fault/blame.

The context, in case you've forgotten, is my current view that crimes did not cause the collapse of the Irish banks, notwithstanding the fact that Seán FitzPatrick and a number of others have - at least - a case to answer in respect of criminal charges. (The crimes in question were not a factor in the bank's collapse). However, it is beyond argument that Mr FitzPatrick is to blame, even if not solely, for the collapse of his bank. There is a handful of others, in that bank and in others, of whom exactly the same can be said.

On the other hand, a much larger number - dozens, perhaps even hundreds, of individuals can be said to have performed their duties with such incompetence that they also share the blame, and have to take responsibility. The nature of that responsibility is almost certainly not criminal in nature, and in some cases may not even have any legal significance at all.

What is a crime ?

In a democracy, "crime" (often, the expression "criminal offence" is used) describes conduct which the population, through its elected legislature, has decided shall merit punishment by the State, such punishment often including deprivation of liberty i.e. imprisonment. (There is no longer a significant number of "common-law crimes", but I will deal with that topic, which Fintan O'Toole raised in this article, in a later post.)

In general, legislators have criminalised actions which are agreed to be "morally wrong", which have serious adverse consequences on a society-wide basis, which were intentional and for which there was no reasonable excuse.

Not all behaviour which we regard as "morally wrong" has been deemed criminal. For example, simple failure to pay a debt is not a crime. Nor is greed or adultery.

Conversely, some crimes are not "morally wrong" in an immediately obvious way e.g. marginally exceeding the speed limit. In the case of yet others, a lot of people will deny that the conduct is wrong at all e.g. smoking cannabis.

Usually, to be a crime, there must be both an instance of prohibited conduct - an actus reus (guilty act) - and a guilty mind (mens rea). In other words, an unintended act will not count as a crime. As is well-known, ignorance of the law does not mean that the perpetrator has no mens rea.If you buy something from a thief, it is only a crime if you know that the thing purchased was stolen. You have still committed a crime even if you incorrectly think that, because you did not steal it yourself,it having been stolen does not matter.

Guilt Can be Complicated

Take the case of a fatal road traffic accident. Two vehicles collide, and one driver is pronounced dead at the scene, while the other is uninjured. Is it always the case that the survivor is guilty of the crime of dangerous driving causing death (maximum sentence 10 years) ? No. Is it always the case that the survivor is guilty of criminally careless driving (maximum sentence 2 years) ? No. Is it always the case that the survivor is guilty of any crime at all ? No.

For readers having difficulty in accepting these negative answers: please consider these possibilities:

• the dead driver was drunk
• the dead driver had a heart attack
• the dead man's vehicle was defective
• the surviving driver's vehicle had been sabotaged

And what if the surviving driver lets slip that he did notice something not quite right about his vehicle ? Does that mean he had mens rea?

For completeness, I should add that some crimes are crimes of strict liability. In such cases, a crime is committed even though the criminal was unaware of doing anything wrong at all. An example is possession of an unlicensed firearm: it does not matter that you did not know it was under your bed, or thought that it was a harmless replica.

I am aware of no "strict liability" crimes which could be said to have been committed in the genesis of the Irish banking collapse. It might be useful for the legislature to create some, though.

In Part 6, I will briefly look at the other forms of legal "blame".

Why They Should Not Be Arrested - Pt.4

"We all know who are responsible for the ruination of our country. If I was compiling the report I would name the bankers, the regulators, and the government ministers responsible. I would then recommend that their pensions and lump sums be withdrawn, have them arrested and have them tried for treason."

This tirade, from a letter in The Irish Times last year, echoing many before, and re-echoed often since, fairly well encapsulates the themes which this series of posts seeks to address.

I list my problems with it a little further down, but I should digress first to stress that I too am an outraged citizen of Ireland, that is to say, a victim of The Madness that gripped this country (and others) until the blow-out of 2008. I do resist resort to the "lynch-mob"; that does not mean that I want no assignment of blame at all. Regrettably, many seem to think that "real justice" went out with the Star Chamber, and the lynch-mob, and that there has been no replacement.

The problems with the tirade are :

1. "We all know who" - Actually I am not at all sure that we do. The names usually "trotted-out" are essentially scapegoats rather than evil miscreants
2. "responsible" - this is a key word, to be discussed in detail as we proceed
3. "withdraw pensions" - in other words, punish by confiscation and probable impoverishment. Without trial or other due process ?
4. "have them arrested" - code for John Gormley's beloved but disgraceful "perp-walk", or as we lawyers call it, "public humiliation, usually at the suspect's workplace, followed by detention without trial, all in the hope of intimidating a suspect into confession, false or otherwise"
5. "tried for treason" - what ? Nothing else ? What's "treason" anyway ? (Note also that "charge" carries with it a necessary implication of possible acquittal)

Like everyone else I know, when a major calamity hits, I look for a culprit behind it. There isn't always one (accidents happen;trust me), but it's natural to check.

When it is possible to identify someone whom we think that we can blame, nowadays we do not simply hang him immediately from the nearest tree. This, I suggest, is not merely because we have now forsaken capital punishment, nor that too many innocent people were victims of that in the past.

Among the real reasons, in my opinion, are:

• our innate fairness
• the need of everyone to feel that guilty verdicts are the end of a rational process of achieving some understanding what really happened
• our appreciation of the fact that "guilt" is not a straightforward matter

The last point is what I had planned to address in this post, but considerations of space require me to defer it to the next, which will now follow more quickly than this one followed Part 3.

Why They Should Not Be Arrested - Pt.3

Before considering the crimes that might possibly have had a causative role in the collapse of the Irish banks, we need to briefly look at the details of that collapse.

(All of the figures which now follow are stated in very "round" figures for ease of understanding, and are roughly, but only roughly, correct).

The Irish banks (those covered by The Guarantee) have "failed" because they have lost €100bn of the €500bn gross assets which they had they thought that they had in June 2008. Out of that €500bn, they owed €360bn to depositors (including multi-billion deposits from foreign banks), and €120bn to the bondholders, leaving a net worth of about €23bn, being capital, reserves and profits retained (i.e. not paid out as dividends).

In theory, then, they could afford to lose €23bn without "going bust". This was, on the face of it, a substantial buffer - Jérôme Kerviel's enormous rogue trading (allegedly) losses were only (!) about €5bn, after all. The somewhat relaxed attitude on the part of some commentators to the notion of guaranteeing the banks should, for balance, be seen in that light.

However, we all now know otherwise, and the insolvency of the banking system, had the State not stepped in, is beyond dispute.

How So Much ?

How could losses at this level, beyond even Morgan Kelly's October 2008 prognostication, have happened ?

In theory, one could imagine, for figures of this magnitude, the following scenarios:

1. Grand theft
2. overall collapse in the economy
3. disease, earthquake/tsunami or other natural disaster annihilating borrowers and their businesses
4. "rogue-trader" type behaviour similar to Nick Leeson or Kerviel (allegedly)
5. poorly-managed speculation in volatile assets e.g.derivatives a.k.a. "rogue trading" with the firm itself as the "rogue"
6. mis-pricing i.e. lending at an interest rate that does not allow the bank to make a profit
7. over-paying for deposits (a variation on 6 above)
8. incompetent lending on a large scale

Incompetence !

Only the last appears to have been significant in the collapse of the Irish banks, though mis-pricing (a type of incompetence in itself) of some loan products (most infamously the "tracker-mortgage") has not helped.

It could also be said that the incompetent lending was largely a factor of under-pricing the loans made, in the sense that lenders did not appreciate how risky the loans really were, and accordingly failed to impose terms of appropriate strictness. I believe that this understates the scale of the miscalculation: many billions were lent for projects so misconceived that no terms could have made the lending profitable.

Many people also suspect that "theft" would better describe many of those loans. Bankers, it is suggested, advanced the banks' money to their friends (actually, "cronies" is the term of preference) and the friends might as well have stolen it, given the improbability that it would be paid back. Notwithstanding undeniable cronyism, I have seen no evidence which comes close to justifying this suspicion, but I remain open to receiving it.

We are left with incompetence: the bankers advanced too much money which will never be repaid.

Incompetence Is Not A Crime

Provided that it is not dishonest, incompetence is not generally criminal. Otherwise, who would 'scape whipping ? as Shakespeare had Hamlet say. There are exceptions to this, though.

Before exploring whether the incompetence involved in this case is, or is not, caught by the proviso, or by other exceptions to the general principle, I am going to explain in Part 4 why there is an important issue at stake.

Update on Wednesday, December 25, 2013 at 08:56AM by Fergus O'Rourke

Two comments to this entry were temporarily lost by me:

Colin McGovern said:

One question to the point about incompetent lending: You say yourself that some of the projects were badly misconceived but also anecdotally, I've heard of situations where the house check involved driving past in a car.

I can see no situation where all of this is merely incompetence since these were valid checks only a couple of years previously. It seems quite clear and I wonder if it can be proven that management in these companies encouraged an environment where reckless lending could take place because of the bigger prize. You can argue that this is merely groupthink at play but if this happened in most other professions, not least medicine or civil engineering, the practitioners would be brought to court. I really don't understand why the fact they were dealing with money and not danger to health and safety really exonerates them.

September 6, 2011 |

I replied:

Colin,

Thanks for yet more useful points. I will endeavour to address them as the series goes on. For now, I will say this:

1. The "drive-by" house survey is not as significant as is commonly assumed

2. Reckless lending is indeed an issue requiring consideration.

3. If you have any examples of professionals such as engineers being prosecuted criminally for incompetence/negligence anywhere in the world, I would like to look at them

4. Money being involved has two-fold significance, in my view

5. First, prosecution for economic losses only is much rarer than when human lives are lost, or put at risk

6. Second, I do think that the phrase "dealing with money" opens the door to some really interesting questions e.g. is banking a "simple business like any other" ? is money just another commodity, like sugar or oil ?

7. The answers to those questions given by different participants in decision-making are revelatory, and deserve a whole book.

September 7, 2011 |

Why They Should Not Be Arrested - Pt.2

In Part 1, I told you about my attempt to arouse interest in a private prosecution of the "criminal bankers", and that it has so far "gone nowhere". The title of this series of posts gives a hint of the conclusion that I have reached as to why that has been so. I will now state it explicitly:

The Irish banking disaster was not caused by criminal behaviour

Indeed, it is not clear to me that the thing that above all caused the banking disaster can even be said to be a matter of straightforward immorality on the part of those who took the decisions which caused the damage.

None of this means that there was no criminal behaviour:there was. Nor does it mean that "immoral" conduct did not form part of the causal mixture:it did. Still less does it mean that no-one needs to be held accountable and possibly to suffer adverse consequences: they do (and some have, adequately or otherwise).

(What primarily caused it, in my opinion, was a loss of risk appreciation by all economic agents involved. Investors in bank shares - and, to a degree, in bonds - came to incorrectly believe that banking was pretty well risk-free. Unfortunately, bank management "bought-in" to this delusion, and behaved in a manner that tested the belief literally to destruction. Bad practices, poor regulation, hubris and other minor factors, including the so-called "bankers' bonuses" problem aggravated the rush over the precipice).

It does not really "give me a warm feeling" to arrive, however provisionally, at this view, notwithstanding that it does mean that people who have been friends and colleagues may not, therefore, be at hazard of being jailed. Like everyone else, my reflex response was to believe that disaster on such a scale had to have A BAD GUY behind it. It is as difficult for me as for everyone else - including, not so incidentally, many of the supposed culprits - to comprehend how so much damage could occur without someone acting in a really evil, criminal, manner.

There is a distinction between responsibility, moral culpability and criminal guilt. I do not think that it is novel or controversial to say that only if there is the latter do questions of "arrests","trial" or "jail" arise.

I would again add that, usually in response to calls for "immediate arrests" or the like, I have regularly posed, in public (on a series of internet fora) and in private, the question "which crime is it that they have committed ?", and have received only one even-halfway-satisfactory answer. I will reveal that answer in a later post in this series. Many plausible as well as some insanely paranoid answers will also be discussed.

My conclusion is not necessarily final: I am open to persuasion that I have got it wrong. And I repeat my offer: find me a way to prosecute privately a banker for something that caused the crash, and I will do it, or help others to do so.

The offence has to have caused the crash: something like a bank official "looting" a customer's deposit account for his own gain, or a bank over-charging a class of borrowers, is of no interest to me for this purpose. Such crimes have always occurred, and, human nature being what it is, can no more be totally eliminated than other crime.

Why They Should Not Be Arrested Pt.1

Matthew Tannin of Bear Stearns being arrested. A jury later acquitted him. (Copyright: San Francisco Sentinel)

This is the first in a series of notes concerning a topic on which I suspect that many readers will, at least initially, disagree with me.

I will be writing in an Irish context, and specifically in relation to the Irish banking sector, but the points that I plan to make can be applied not only to other sectors but also outside Ireland.

It may be useful to begin by noting this: for approximately the last four years (since solicitor Michael Lynn fled the jurisdiction), I have regularly - in public (on a series of internet fora) and in private - sought assistance, and/or offered to assist others, to privately prosecute any one of a series of notorious alleged miscreants, starting with Mr Lynn himself. All of these objects of public obloquy have in common that their (alleged) misdeeds are associated with Ireland's drastic change of economic circumstances since circa 2007.

No Takers

Although I have not given up, and the offer is still open, I have had no "takers". Not one. Zero.

This is surely very odd, considering that nearly everyone with whom I have ever discussed the matter - and that includes dozens of lawyers - is convinced that our current economic Armageddon is the result of criminal mis-behaviour (their emphasis) by a large collection of people belonging to one or more of the following groups:

bankers, regulators, politicians, auditors, economists, lawyers, auctioneers, accountants, civil servants, builders and property developers.

Yet, these discussions have failed to generate a single candidate who could be prosecuted for an identifiable crime !

It seems to me that this failure should be at least as difficult to understand as the absence of public prosecutions to date. This series of posts is my attempt to elucidate the issue.