Prosecuting bankersBlind justice

Why have so few bankers gone to jail for their part in the crisis?

From the print edition | Finance and economics

May 4th 2013, 01:00
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CRIME sometimes pays unusual social dividends. In 2010 So Paulos museum of
modern art hosted an exhibition of works that had been seized from a variety of
crooks and drug traffickers. Some of the art had belonged to the founder of a
Brazilian bank, Banco Santos, that had collapsed in 2005. After the banks
liquidation Edemar Cid Ferreira lost his art collection and his home, was convicted of
crimes against the national financial system and money-laundering, and
sentenced to 21 years in jail.
For better or worse, many people would love to see more bankers behind bars for
their role in blowing up the Wests financial system. In Britain not one senior banker
has faced criminal charges relating to the failure of his institution. A handful have
faced the lesser sanction of being barred from running another bank or company, or
agreeing in settlements with regulators not to do so. (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 werent at
fault.)

In America the Federal Deposit Insurance Corporation has filed over 40 lawsuits
against officers and directors of failed institutions since 2010; more actions are
expected. But prosecutors have brought few criminal charges against high-profile
bankers. The American government secured its first crisis-related conviction of a
senior banker, a Credit Suisse employee charged with mismarking mortgage-backed
securities, only in April; Kareem Serageldin will be sentenced in August.

The prosecutorial coyness of British and American authorities contrasts with the
harder-charging approach taken by their predecessors and by authorities elsewhere.
During Americas savings-and-loans (S&L) crisis in the 1980s more than 800
bankers were jailed. A decade later directors of Barings, a British bank that was
felled by the rogue trader Nick Leeson, were barred from holding directorships
despite having no direct connection to his wrongdoing. Other countries, such as
Iceland and Germany, have taken a more muscular approach in this crisis (see
table).
Some of these differences seem to be down to political will. In America the federal
government dedicated considerable resources to investigating fraud during the S&L
crisis. William Black, a professor at the University of Missouri at Kansas City and a

former bank regulator involved in charging S&L executives, has testified to

lawmakers that regulators have given the FBI scant help during the current crisis.
Iceland managed to assemble a dedicated team of more than 100 investigators who
have won convictions against executives in charge of Glitnir, a failed bank, and are
bringing charges against other high-profile bankers and businessmen, including the
bosses of Icelands other two big banks. In Spain the behaviour of some 90 former
bank executives and board members is under investigation. Dodgy deals with
cronies, soft loans for themselves, allegedly irregular salary and pension packages,
inflated golden handshakes and overgenerous fees for attending rubber-stamp
meetings are all being scrutinised.
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There are also differences in the laws that can be applied. The main reason that
American and British regulators give for the paucity of prosecutions is that they
have struggled to connect wrongdoing lower down in the bank, such as the LIBOR
scandal, to those running it. Another is that it is generally not illegal to run a bank
into the ground through incompetence (although British and German policymakers
are consulting on the introduction of criminal sanctions for reckless management).
The threshold for getting bankers banged up is lower in some places than others,
however. Germany, Switzerland and Austria, for instance, have an elastic concept
called Untreue, or breach of trust, which is defined as a derogation of duty that
causes real damage to the institution. Since the crisis German prosecutors have
charged bankers at firms including WestLB, BayernLB, HSH Nordbank and Sal
Oppenheim on offences including Untreue.
In Brazil, the law is stricter still. It holds banks executives and directors (and even
their controlling shareholders) personally liable to repay the debts of failed banks
even where no fault is proven. The idea is really to put the managements net
worth at stake, says Jos Luiz Homem de Mello of Pinheiro Neto, a So Paulo law
firm.
Yet imposing stricter standards of liability has costs. It would overturn a tradition in
English and American law in which courts avoid second-guessing business decisions
that are honestly made but wrong. Heinrich Honsell, a law professor, sees the use
of Untreue recently in commercial cases as a disturbing phenomenon. Its not right
to criminalise negligent mistakes, he says. Very soon judges will be telling us how
to manage risk. Opponents of the idea of a law against reckless management warn
that the effect would be to discourage risk-taking of any sort.
But if locking people up for incompetence goes too far, regulators could still get a
lot tougher. Summary justice isnt desirable. Some justice is.