Felix Salmon

I was off the grid for most of the long weekend, which allowed me to curl up with a pulpy thriller for the first time in many, many years. I’m by no means an expert on the genre, but if you’re a reader of this blog and you like such things then there’s a good chance that Dead Bankers, a novel by Philip Delves Broughton, might be exactly for you; there’s a paperback version here if you don’t have a Kindle.

The thing that makes this book so great to read right now is not the fact that it’s full of the usual thriller ingredients — glamorous protagonists, jet-set lifestyles, money and sex and death and all that. Rather, it’s the thrill of seeing the whole financial crisis fictionalized, with thinly-veiled real-world figures (Hank Paulson, Steve Schwarzman, Nat Rothschild, Chris Hohn, Henry Kravis, Roman Abramovich) being caught up in intrigue and murder and blackmail for stakes in the billions of dollars. I don’t want to give too much away, but suffice to say that no matter how bad your view of these figures is right now, the chances are that Broughton’s is much, much worse. And that the walk-on role given Schwarzman’s crab claws is particularly delicious.

If anything, the problem with this book is that it’s almost got too much real-world material in it: it’s harder to forgive a couple of the more extreme financial contrivances when you know that the author went to Harvard Business School and knows his material so well. But there’s no doubt that the book is fun to read and extremely timely. If you’ve ever fantasized about what would happen if the people who helped create the global financial crisis started getting serially murdered, you should give this book a go.

Matthew Kelley asks whether the 14-year sentence for the former head of El Paso Corp.’s natural gas trading business isn’t excessive; my feeling is that it makes a certain amount of sense.

For one thing, there are lots of excessive sentences in US jurisprudence, and there’s no reason why white-collar crimes should be exempted from that phenomenon. Indeed, the opposite is arguably the case: in the case of most crimes, it’s pretty obvious in the wake of the crime that a crime has taken place, and as a result a police investigation is immediately launched. Much of the attraction of white-collar crime, by contrast, lies in the fact that if it works, there’s a very good chance that no one will ever know that a crime ever happened at all.

As a result, a much lower proportion of white-collar crimes is investigated than of crimes as a whole — and that’s before you get to the question of whether or not they can be successfully prosecuted. After all, these are complex things, and hard to prove beyond reasonable doubt, as the prosecutors of Ralph Cioffi know full well.

Given (a) the low probability of being investigated, then, along with (b) the far-from-certain probability of being successfully prosecuted even if you are investigated, and (c) the enormous potential rewards, it’s easy to see how white-collar crime is very attractive. And the government has very few tools against it beyond very stiff sentences for those criminals who are investigated and tried and found guilty.

Against all of that one has to put the strong principle that the punishment should always fit the crime — and in this case, which is arguably victimless, a 14-year sentence does seem harsh. Still, it’s important to remember the amount of money involved in these cases. Few Texans would object to a 14-year sentence for a simple thief who stole $1 million, and I’m sure that James Brooks ended up making much more than that in excess bonuses tied to his fraudulent reporting.

More generally, it’s easy to lose sight, in the high-speed world of trading, of the fiduciary responsibility shouldered by people moving billions of dollars of other people’s money. A huge amount of the anger directed at Wall Street, especially in the wake of the financial crisis, is a result of the fact that this is real money we’re talking about here, and a lot of the brash young traders on the Street seem to have no conception of the value of a dollar. If sentences like this help to sober them, that’s undoubtedly a good thing.

Just in case you were feeling all happy about the book giveaway, let me bring you down to earth by pointing you to Law and Order in Russia, a website set up by Hermitage Capital Management in memory of their noble Russian lawyer, Sergei Magnitsky. Do read his story, it’s horrific, and I hope it shames the Russian government to do more than simply fire major general Anatoly Mikhalkin of the Moscow Interior Ministry (although that’s a good start).

It’s quite amazing, the way in which the Russian police — with full impunity — managed to steal a whopping $230 million which Hermitage had paid in taxes in 2006. Magnitsky seems to have been unexpected collateral damage. Do spread this story: it shows in the most visceral way just how lawless Russia really is.

(Many thanks to Jesse Eisinger for the heads-up.)

How much money does the international drugs trade make, and how much of that money helped out the global banking system when liquidity dried up last year? According to the UN, the answer to both questions is “a lot”:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

I’ve spent a chunk of this morning rooting around the UNODC’s website to see if I could find a source for that suspiciously-precise $352 billion number, but I couldn’t: if someone can point me to the report which generated it, I’d be much obliged. I did however find a press release in which Costa said that corruption was “the cause and consequence” of the financial crisis, which does make me suspect that he’s prone to talking his own book here. (The financial crisis had many causes, but corruption wasn’t even in the top ten.)

So I’m filing this one under “empirically-dubious publicity-seeking” for the time being, if only because Costa is prone to statements like this:

Mr. Costa said: “Nicolas Cage’s characters have exposed us to some of the darkest aspects of human nature. Now he is championing one of the most noble – the quest for justice. The Lord of War has become a messenger for peace, the Bad Lieutenant has turned into a good cop, and the inmate from Con Air has become a champion of prison reform. His star status and strong conviction on these issues will help us achieve security and justice for all.”

Or, to put it another way, the forces of evil and corruption were responsible for causing the financial crisis. But don’t worry, we’ve got Nicolas Cage on our side, so the good guys are bound to win.

(Via Yves)

Joe Weisenthal asks, provocatively enough, whether I, had I been a banker during the credit boom, might not now be held criminally liable were the crime of bankslaughter on the books:

We wonder if Felix had been a banker whether he’d be guilty of bankslaughter. After all, in his research into the subject, he concluded early on that the issue of mortgage defaults wasn’t likely to be a huge deal. Later he changed his mind and of course, defaults proved to be a gigantic problem.

But if I were a prosecutor, I’d have no problem convincing a jury of 12 that a “reasonable” banker should’ve known that lending money to people of dubious credit risk, with low loan-to-value ratios, in an inflated market would’ve been a recipe for disaster.

Well yes — but that’s kinda the whole point. You don’t want the managers of systemically-important banks being as careless as I was on the subject of default risk. Here’s what I wrote in the piece that Weisenthal links to:

A little knowledge is a dangerous thing: I would have been much better off with a completely naive view than I was with a very basic grounding in mortgage finance.

I did some paddling around in the shallow end of the theory of mortgage bonds, and what I found surprised me: no one seemed to be the slightest bit interested in default rates. The prices of mortgage bonds were entirely a function of prepayment rates, and default rates simply didn’t enter into the equation.

Now I’m a finance blogger who prides himself on being wrong every so often (my slogan is that “if you’re never wrong you’re never interesting”) and who has essentially zero equity in being right. My job is to hold up my end of the conversation, not to be some kind of all-seeing market guru.

The manager of a systemically-important bank, on the other hand, is in a very different position, with vastly more responsibility. If such a manager did no more than do “some paddling around in the shallow end of the theory of mortgage bonds”, and on the basis of that took hundreds of billions of dollars of potentially highly-toxic assets onto his balance sheet, then yes, that’s highly reckless activity. And it’s probably reasonable to assume that if the crime of bankslaughter had been on the books at the time, then maybe such a manager might have thought twice before rushing in to such markets.

The key insight is that “financial innovation” is not the kind of thing you want too much of at too-big-to-fail institutions. Writes John Carney:

Collier doesn’t seem to have given much thought to the costs of over-deterrence. Bank executives faced with the prospect of a criminal investigation and possible conviction would likely be overly cautious. We’d lose a lot of socially beneficially risk taking by criminalizing bank failure.

For me, over-deterrence is a feature, not a bug. We’ve seen where Carney’s “socially beneficially risk taking” has landed us, and frankly I’d rather have rather a lot less of it.

Carney concludes:

Because bankslaughter is backward looking but conducting business is forward looking, it would almost certainly result in wrongful convictions. Lots of activity that looks reckless after the fact can seem perfectly sensible ahead of time. Unless the crime required bankers to know they were being reckless—in which case it would deter almost no-one and result in approximately zero convictions—it would wind up punishing bankers for just being wrong.

In an ideal world, of course, there would be no wrongful convictions simply because there would be no convictions and indeed no prosecutions. And Carney is right that it seems unfair to convict a banker of a crime just because he was heading up a too-big-to-fail institution and made a bad decision.

On the other hand, having the statute on the books would certainly increase incentives not to become too big to fail: it would help keep banks small. A capitalist society works by having private businesses take risks and fail. A capitalist society fails when private businesses are too big and systemically important to be allowed to fail. And so I think there is a case to be made that the managers of those businesses should be held to a significantly higher standard than managers elsewhere.

Paul Collier is worried about the skewed incentives built in to any bonus system: the upside of taking risk — a big bonus — is much bigger than the downside if the risk blows up:

The inherent problem facing shareholders is that incentive payments cannot go negative. However much damage a manager inflicts, wiping out both shareholders and depositors, the consequences cannot be remotely commensurate.

Collier has a solution: a new crime, called bankslaughter.

With bankslaughter, when the bank blows up – even if it is a decade later – a criminal investigation traces back to determine whether crucial decisions were reckless. If a reasonable banker faced with the information available at the time would not have taken those risks, the person responsible is dragged off the golf course and jailed.

Once bankslaughter was on the books, bonuses would be less dangerous. Managers would have to weigh the balance between risk and return and take defensible decisions. I doubt hyper-caution would be a problem: the overly cautious would not get bonuses. Surely we can rely on our bankers to exhibit the necessary degree of greed.

Is it reasonable to hold professionals criminally liable if they take reckless risks with other people’s money? I don’t see why not. Especially if they work at a leveraged and systemically-important institution. After all, people can be jailed for insider trading, which is far more of a victimless crime than bankslaughter.

Update: Jeff had more on this — including crediting the name to Timothy Garton Ash — last week.