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 |