Reckless bankers, or just stupid and idle?: James Saft

July 9, 2013

By James Saft

(Reuters) – As Supreme Court Justice Potter Stewart once said of pornography, we may not be able to fully define the proposed new British offense of “reckless banking” but I suppose we will know it when we see it.

Or perhaps, as has been the case about obscenity since 1964 when Stewart dissented in an opinion about the prosecution of a French film, we will just become more used to it.

The British Treasury on Monday said it planned to introduce legislation making possible criminal prosecution of senior bankers for reckless misconduct, a step suggested last month by a parliamentary commission on banking standards.

“The government is determined to raise standards across the banking industry to create a stronger and safer banking system,” British Chancellor of the Exchequer George Osborne said in introducing the government’s response. “Cultural reform in the banking sector marks the next step in the government’s plan to move the whole sector from rescue to recovery.”

The Treasury said it would look into framing the law, which might be applied in situations in which senior bankers, a narrowly and well defined class of employee, could be found to have been reckless.

“This offence to be pursued in cases involving only the most serious of failings, such as where a bank failed with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers,” according to the original recommendations by the Commission. (here)

While on some level emotionally satisfying – after all, the dearth of prosecutions of bankers is one of the scandals of the post-crisis period – this effort strikes me as being unlikely to have much positive benefit while only distracting efforts away from prosecuting the good old-fashioned fraud and criminal misrepresentation which was so rife.

Reckless, like ‘obscene’, is one of those words which ultimately must refer back to a subjective definition, in this case of what constitutes proper care. Expecting to divine what proper care is in the banking industry ignores its history, which is littered with follies which seemed a good idea at the time, and which were good business for a little while, but which later fell apart. What exactly will make a banker reckless, rather than simply stupid, foolish or just idle and promoted above his or her abilities?

LONG PAYOUTS AND CAREER RISK

If the prosecution of recklessness is going to have much of an effect, it will be by throwing such a scare into bankers, exactly because it may be arbitrarily used, that they cut back severely on risk taking across the board.

Again, how exactly do you demonstrate that you weren’t reckless? Like obscenity, will it be in comparison to community standards? Sadly, those change over time, and often degrade during periods when risk taking is rewarded. And after all, much recklessness isn’t ever punished; indeed it often meets with success.

Introducing the potential for a prison term might tip the balance back towards prudence, but it will do so in a ham-handed way with the potential for much injustice.

This is not to say that Britain isn’t generally on the right track in taking a more aggressive stance towards its banking industry.

Proposals to make bonus payments be handed out, or vested, over a longer period, are a great idea in that someone who knows they must stick around and not be unmasked as a self-serving risk taker for eight or 10 years is more likely to not be, well, reckless.

And indeed, locking people up for having violated one of the many criminal statutes already on the books would have just the kind of effect Britain hopes the institution of this new offense would have, but be much cleaner, and perhaps less likely to have negative knock-on effects.

Bankers, in my experience, respond directly, if not always accurately, to their perception of the risks and rewards.

Of course many bankers behaved, and behave, recklessly, including at the very top. One of the best ways to counteract that is to take other steps which will lower the rewards to recklessness, and thereby change the calculus. That means shaping an industry in which one can get rich as an employee over a career but not in a frenetic market cycle such as 2003-2007.

Steps which will lower leverage, steps which will cut the size of the largest and too-big-to-fail banks, and especially steps which will give shareholders more power to hold managers and employees in line would all be welcome, particularly some of the recommendations of pay and its review by investors.

By all means, let’s prosecute bankers. We have enough existing crimes, and criminals, to do so without making up slippery new ones.

(James Saft is a Reuters columnist. The opinions expressed are his own)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

(Editing by James Dalgleish)

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