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.

AN OPEN LETTER TO THE DIRECTOR OF CORPORATE ENFORCEMENT

Ian Drennan

Director

Office of the Director of Corporate Enforcement,

16 Parnell Square,

DUBLIN 1

Dear Mr Drennan

In June 2011 - as you will know, since it was on your Office's application - the High Court ordered the disqualification of a former CEO of National Irish Bank ("NIB") from acting as a company director for 9 years. Other NIB senior personnel have also been disqualified. The basic reason was the bank's misconduct when directed/managed by the individuals in question - mainly its role in sophisticated tax-evasion schemes.

The loss to the State from these schemes was shocking at the time, but would barely raise an eyebrow today.

Nearly 5 years after nearly all of the State's banks were exposed as insolvent, no legal action has been taken against the vast majority of those who steered their companies from great wealth to multi-billion euro deficits, in the process doing cataclysmic damage to the finances of the State and of its citizens, as well as impoverishing many shareholders.

It is said, with justice as far as we can tell, that no crimes were committed. More questionably, it's said that no individual broke any term of his or her employment contract. It is even claimed - or at least implied - that not one bank director was in breach of his/her duties as a director even as they all managed their banks into insolvency and ruin.

The new managers and shareholders of the banks either share these remarkably benign views of the stewardship exercised by their predecessors or (more likely) assign a low priority to what they consider a mere "blame game".

However, in our view, this is not good enough. We are surprised that you appear to think that it is. Your office is responsible for ensuring that company directors, auditors and senior managers meet minimum standards of behaviour and probity. It is extraordinary to the point of scandal that there has been no visible action taken in this regard, and there is no indication of any intent to do so. This point has already been made to your Office privately, but you have felt unable to respond meaningfully. Your office has been a model of prompt and courteous communication, but we remain dissatisfied that nothing of substance has been said.

Your lack of visible action makes it difficult to avoid the conclusion that you are not going to do anything beyond what you have already in train in regard to Anglo. Our view is that those proceedings address relatively trivial matters and/or events which represent consequences rather than the causative failures of governance.

This letter is to formally request you, as a matter of urgency, to seek disqualification of every auditor, senior manager, and director (of relevant subsidiary companies, as well as main board members, and including shadow directors) of all banks licensed in the State. Again, it will be as obvious to you as it is to us, but some individuals will have little difficulty in showing that disqualification would not be appropriate for them. We suggest that it would serve the public interest for this to be confirmed, after full consideration, by you or by the High Court. It would also, arguably, be of benefit to the individuals in question. It would only be fair to allow those who performed their duties to the required standard to show the world that they did so.

We understand that protocols have to be followed. For example, in the case of NIB, Inspectors were appointed and your Office based its applications largely on the findings made by the Inspectors. Whether the same needs to be done for - to name but one - AIB plc, given the comprehensive reports already in the public domain and others apparently available to current management, is questionable, but if it does need doing, it is long overdue.

Yours sincerely

Fergus O’Rourke, Lawyer & former banker

Karl Deeter, Irish Mortgage Brokers

Michael Hennigan, FinFacts

Seamus Carrick, F.C.C.A., Trinity Accountants

James Lee, solicitor

Eoghan O'Leary, company owner

Declan O'Toole, solicitor

Brian Lucey, TCD

Constantin Gurdgiev, TCD

Arthur Doohan, Consultant

Gerard Sheehy Financial Adviser

Kealan Flynn, Public Affairs Adviser

Deirdre de Burca, former Senator

Danny Keohane FRIDE, Brussels

Colm Fitzgerald, actuary

Dermot Conway, solicitor

David Hall, Irish Mortgage Holders Organisation

Brian Kelly,Independent I.T. Consultant

Michael Logan, Businessman

Brendan K. O'Rourke, Dublin Institute of Technology

Michael O'Neill Architectural Graduate

Cathal Malone, Barrister-at-law

Dermot Casey, Lecturer, UCD

Tom Baldwin,solicitor

Kate Bopp, Co-founder, N.G.O.

Declan Flynn, Kilternan

David O'Brien, Monkstown

Caitriona Warfield,Saggart

John Agger, Cobh

Dermot Kenny, Small business manager

Cathy Dalton Architect,researcher, lecturer

Joe Cunnane F.C.A. Accountant & Tax Advisor

(Your name will be added here if you so request in a comment below)
Copy sent to each T.D. and Senator


PDF version of the Open Letter here and of a legal background note here

Update on Sunday, April 7, 2013 at 08:37AM by Fergus O'Rourke

Note to commenters: Your name and brief description (together with a link to your information) will be added to the letter above, but only if you make it clear that this is what you want.

Update on Sunday, April 7, 2013 at 07:47PM by Fergus O'Rourke

Brian Kelly has been added as a signatory

Update on Tuesday, April 9, 2013 at 11:04AM by Fergus O'Rourke

Michael O'Neill, Michael Logan and Brendan K. O'Rourke added as signatories

Update on Wednesday, April 10, 2013 at 03:26PM by Fergus O'Rourke

Cathal Malone has been added as a signatory

Update on Wednesday, April 10, 2013 at 09:14PM by Fergus O'Rourke

Dermot Casey has become a signatory

Update on Friday, April 19, 2013 at 10:01AM by Fergus O'Rourke

Tom Baldwin and Kate Bopp are now signatories

Update on Thursday, April 25, 2013 at 11:26AM by Fergus O'Rourke

Declan Flynn, Caitriona Warfield, and David O'Brien have been added as signatories

Update on Sunday, May 5, 2013 at 08:11AM by Fergus O'Rourke

John Agger has become a signatory

Update on Wednesday, May 8, 2013 at 11:16AM by Fergus O'Rourke

Dermot Kenny has become a signatory

Update on Tuesday, May 14, 2013 at 12:11PM by Fergus O'Rourke

Cathy Dalton and Joe Cunnane have become signatories

Resumption of My Arrested Series

Readers will recall that the next, ninth, part of the series was to address the question

so, do they just get away with it, then ?

I was not very happy with the answers that I was getting to my own question, but patience has proved worthwhile, at least to me. While I was contemplating and researching the question, a number of things happened that affect things a little bit:

• Eugene Sheehy, CEO of AIB when "the ship hit the rocks", agreed to forgo part of his pension
• The rump of Anglo Irish Bank and Irish Nationwide Building Society, which had been consolidated as Irish Banking Resolution Corporation ("IBRC") was put into liquidation by the Government.
• The Liquidators quickly moved to sue Fingleton and others
• Seán Fitzpatrick and two of his former co-directors of Anglo have been formally charged with criminal offences. The charges relate to illegal concealment of loans to directors and to provision of loans by Anglo for the purchase of the Quinn stake in Anglo itself
• Ex-CEO Jim Lacey and some other former directors of NIB (now Danske Bank (Ireland)) were disqualified as directors

As I have previously observed, the crimes on which the Anglo Three will face jury verdicts are not of any real consequence as causes of the Collapse. It is matter of great regret as far as I am concerned that almost all of the time and other resources of the Office of the Director of Corporate Enforcement("ODCE") were diverted into the project of prosecuting these matters.

The other developments listed above are more significant, in my view. Together, they point the way to how, where the will is present, it is possible for the law to do something in recognition of relevant personal failures on the part of individuals even if, as it appears, no crimes of significance were committed and arrests are therefore ruled out.

Over the next few days, I will be sharing my conclusions in this regard.

Do remember, though: I am, I hope, not indulging in vindictiveness and my use of the phrase "getting away with it" must not be understood as suggesting that any crimes contributed to the Collapse, or that anyone guilty of a criminal offence connected to the Collapse is going unpunished. I cannot guarantee, of course, that the latter is not happening: all I can say is that I am aware of no evidence that it is, and everything that I have seen over the last five years suggests that such evidence is lacking.

Thoughts on an Arrested Series

In the old, originally French (I think), sense of "halted", my 10-part series (the first 8 parts are here) has itself been arrested for some time now.

I will explain why in due course, but some interim observations may be of interest

Yes, Irish bankers are just as liable to commit criminal offences as any other occupational group, and I have no reason to suppose that they are more virtuous than, say, journalists,lawyers, politicians, priests or academics. However, once again, I must emphasise that in this series I am looking only at the issue of crimes which may have been causative of the collapse of the Irish banking system.

Greed - which many see as the fundamental cause - is not in itself a crime, and I cannot see any workable manner in which it, simply as such, could be made one.

Fraud and insider trading are crimes, and their incidence increased in the period up to the Collapse, but they neither caused the Crash nor significantly contributed to the cost of it in Ireland (it may have been otherwise elsewhere e.g. in Iceland).

There is no evidence - that I have seen - of involvement in such nefarious activity by prominent individuals in the Irish financial institutions, civil service, regulatory establishment or politics, with the possible exception of the Anglo/Quinn debacle. (And in that sub-story, most of the credible allegations relate to what was effectively an increasingly desperate and always futile campaign to prevent the Collapse which had already become inevitable, probably from the beginning of 2007 or even earlier).

Journalists such as Matt Cooper (in many ways otherwise admirable) react by saying that if we cannot prosecute them, then "we" must excoriate them using "our" ability to "name and shame". What is meant is not even "trial by media" - trials have rules - but more or less ignorant demagoguery, which tells us more about the moral standards of those engaging in it than about the guilt of its targets.

More serious commentators, in particular Colm McCarthy, refer constantly to "lack of clear answers" and, while acknowledging the possible lack of criminal behaviour, persist in suggesting that there must have been an original "sin", committed by an individual or by a small number of people, which drove the banks "onto the rocks". They say that the Nyberg and its preliminaries dodged this question and point to the Bankruptcy Examiner's Report into Lehman Brothers in the U.S. as a model.

Let me (again) make a few additional pertinent points:

1. As the regular visits to Gárda stations by Mr FitzPatrick and a few others demonstrate, arresting is, among other things, in itself an idle recourse.
2. Charging and then bringing to trial are what matters.
3. I am not opposed to imprisoning bankers if they are convicted of serious crimes.
4. There is little reason to believe that the Irish banking disaster was caused by any Irish banker committing a serious crime known to Irish law.
5. Note that this does not equate to saying that no Irish banker has committed a crime known to Irish law. It also does not, of course, mean that Irish law may not have been lamentably lacking
6. As to whether breaches of the law were serious or otherwise, most were not, as far as I can see. The evidence on serious alleged crimes is not yet in the public domain (leaks do not count: they are usually inaccurate). My guess – not all that educated – is that at least one Irish banker is guilty of at least one of the serious alleged crimes. But the crimes in question did not contribute to the occurrence of the banking catastrophe for which we are all paying.
7. I believe that we need to legislate for more banking crimes, but we cannot in 2013 make something that happened in 2008 (or before it) into a crime now if it was not one at the time. The argument that the "common law" would have always regarded some relevant behaviour as criminal has proven impossible to sustain.
8. Furthermore, I am sympathetic - just a little - to Nassim Nicholas Taleb’s idea that we should perhaps reconsider the virtues of the death penalty, as in China, for disastrous errors of bank management.
9. There is no need for you - I am addressing the vocally impatient among us - to wait for the Director of Public Prosecutions, if you think – understandably – that she is too slow. The option of private prosecution, though of limited utility, is available if anyone thinks that there is enough available to proceed against anyone.(Read the recent English case of Gujra which includes a discussion of the merits of this procedure. The position in Irish law is very similar.)
10. But the truth, which those who shout loudest on this will not admit, is that you don’t have such a basis. Or else, you’re too lazy and prefer to shout than to do something useful, while complaining that others owe you a duty to do what you will not do yourself.
11. You are not alone. For years now, I have been offering to help anyone who wants to do something about it. Want to guess how many have even enquired about the possibility ?
12. The answer is: 1. No, not one hundred or one thousand. Yes, I mean the number between 0 and 2. I have had a single enquiry.
13. More correctly, the answer is still: zero, because that query – which only came in a few months ago – turned out to be from a bank shareholder who wanted to seek personal compensation from a former bank director.

Reasons To Be Cheerful #6

Swiss business school IMD publishes an annual World Competitiveness Survey. In the 2012 survey published earlier in the Summer covering 59 countries, Ireland comes out quite well, and is improving. As highlighted by Digital Times here, we are

• 1st for availability of skilled labour
• 1st for flexibility and adaptability of workforce
• 1st for investment incentives
• 1st for attitudes towards globalisation
• 2nd for business legislation-openness to foreign investors
• 2nd for large corporations that are efficient by international standards
• 2nd for adaptability of companies
• 4th for Corporate Tax rate on profit and real corporate taxes

Why is our overall ranking still only 20th out of 59 ? You are not getting that information in this post - look at the title, please ! - but here's a hint: electricity.

Nonetheless, it remains true that "we" are clearly doing some things very right.

On "Getting Away With It"

Any resemblance of any hypothetical characters mentioned hereinafter to real persons, living or dead, is purely coincidental.

Consider this scenario:

It is a "stark and dormy" night. (Who said Bulwer-Lytton is forgotten ?) On an unlit road, a tanker's valve somehow spontaneously opens - nobody ever provides a satisfactory explanation as to how or why - and the road surface is soon covered in a black-ish, smelly, viscous liquid. Some minutes later, a motor-car encounters the liquid, the driver - whom I shall call Mr Cooper - loses control and a very nasty accident happens, resulting in several deaths.

Cooper survives, however.

Is he jailed ? Prosecuted ? Arrested, even ?

No. Instead, he lives on, a free man "without a (legal) stain on his character". As Pat Rabbitte once asked, though, is he happy ?

Many people consider this to be outrageous. Four years later, some - and not just the predictably ignorant or intemperate - still mutter about how "the crook got away with it" (and believe it).

Now, unless you are new here, you will not be surprised to learn that my natural inclination is to resist such talk. I will ask to know which crime the unfortunate Cooper is supposed to have committed, why his broken tail-light or out-of-date driving licence had anything to do with the tragedy, even though they were criminal offences - albeit very minor - and so on.

My guess is that, even if you did not "buy" similar arguments already made by me in this series, you might see some value in them in the context of the hypothetical Mr Cooper.

It's an interesting exercise to discuss - as I have done with some people - why "the Coopers" are likely to get more sympathy (and, in my view, more justice) than "the bankers". Let us not detain ourselves with that discussion now. (We can return to it if there is a desire to do so).

However, in this article, I am going to explore the other side of that argument.

Let's go back to Cooper, and make the picture painted of him a little less straightforward, and thus, arguably, more realistic.

Breathalysed at the scene, he tested positive and while the subsequent blood test showed the alcohol in his blood was well below illegal levels, it also showed traces of psychotropic substances. At the time, however, the law did not specifically make it a criminal offence to drive in this condition.

Police investigation also revealed that Cooper's vehicle had at least two tyres marginally "bald", and that he had almost certainly been both driving too fast for the conditions and, worse, had been doing so with a telephone clamped to an ear with one hand.

All that said, the police had no doubt that none of these circumstances contributed to the tragedy, in which Cooper lost not only his only two children but several close friends who happened to be on the road at the unfortunate time. Even if Cooper's vehicle had been in perfect condition, even if he had had no alcohol or other intoxicants in his blood, had had his licence up to date, and had been driving with perfect care and attention, the people would have all died anyway.

Despite these circumstances, should the police charge Cooper with DDCD ("dangerous driving causing death") or less serious offences under the Road Traffic Acts because, otherwise, he will "get away with it" ?

Am I alone in wondering how a man involved in such a horrific scenario will ever get over it ? To me, the question of him getting away with it is out of place.

I would like to hear from those with a contrary view.

(We are not going to detain ourselves at this point with exploration of the culpability of Lehman Brothers, the haulage firm which owned the oil-tanker - imagine that ! - or of any other dei ex this particular machina. But don't forget the disclaimer above.)

NOBODY Expects...

If someone, client or not, approaches me and gives me information in confidence - that is to say, on the strict understanding that I shall not divulge it to another without my informant's permission - then I will consider myself bound in conscience not to divulge it. The nature of the information is not relevant to my obligation, once I have accepted the information on that basis of confidentiality. (Naturally, one should not rashly or casually enter into such a situation).

If a law should be passed providing that the State shall be entitled to demand of me that I break the confidence, I will prefer to break that law than to betray my informant's trust.

Martin Luther is not really a hero of mine, but he did have his moments. I adopt his wonderful statement

Unless I am convinced by ... plain and clear reasons and arguments, I can and will not retract, for it is neither safe nor wise to do anything against conscience. Here I stand. I can do no other."

Henry David Thoreau expressed it thus

If the machine of government is of such a nature that it requires you to be the agent of injustice to another, then, I say, break the law.

Is This Not Immoral ?

There are those who say that what I am expressing above is an immoral stance. The only justifications so far advanced (to my knowledge) for that view are

1. "A citizen is morally obliged to obey the law"

   There is an implication that that obligation is subject to no qualification, reservation or exceptions, and is, therefore, unlimited. In turn, this seems to amount to saying that the civil law is always identical with morality.

   Can this really be the case ? What about the position of the defendants at Nuremberg - most of whom claimed that their misdeeds were entirely legal under German law of the time- then ? Were their punishments wrong ?

2. "The ends justify the means"

   Not many realise that this formulation was apparently much used by Torquemada, the villain of The Spanish Inquisition, and that it was precisely this formulation that was repudiated very quickly by the Vatican authorities of the time, and which for centuries was regarded by all educated people as the very epitome of immorality. It is still so regarded by me.

Many readers will protest that the context of this discussion is everything, that context being the need to address the problem of the sexual abuse of children, and the failure to reveal it for so long.

Context cannot be unimportant, but is it ever all-important ? I say not. Furthermore, it will be seen that references of this kind to "context" are but another way of saying that the end justifies the means.

Do I think that there are NO circumstances in which I would break a confidence ? "Never say never" is a good rule. Indeed, to say "never" is to bind one's future conscience with the decision of an earlier consideration, which may have been imperfect for one reason or another.

However, I refuse to delegate the exercise of my conscience to the legislature, and still less to "public opinion", any more than I am willing to delegate it to the Pope.

Note that I make these remarks not in my capacity as a lawyer, but as a human being.

What ? The Market is Not Our God Now ?

A sentence to ponder:

"...we find it impossible to believe that anyone's natural or default view would be that market prices are "wise"."

So say Friedman & Kraus - no liberal lefties they - at page 151 of Engineering The Financial Crisis.

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 ?

Book review: "Engineering The Financial Crisis" by Friedman & Kraus

"Engineering The Financial Crisis" by Jeffrey Friedman & Wladimir Kraus, University of Pennsylvania Press. Available from Marston Book Services, 160 Milton Park, Abingdon, Oxon, OX14 4SD, England / direct.orders@marston.co.uk. Price £29.50

This is a superb book, which deserves to be read by anyone who is serious about trying to understand how the Banking Crisis happened.

It has insights to offer on more general topics as well. These relate inter alia to the (alleged) delusions of the economics profession, the futility of some common expectations of democratic policy-making, and even to the limitations of human capacity to manage the complex systems that now dominate our lives. We think we understand these systems because it is we (or people like us) who constructed them, but even the most sophisticated of us are sometimes caught out.

A long time ago, the American wit H.L.Mencken observed

for every complex problem there is an answer that is clear, simple, and wrong.

The response of commentators, wherever located, to the Banking Crisis illustrate this quite well. The standard narrative (hereinafter "TSN"), not just in Ireland, is that what happened in 2008 followed years of reckless behaviour accompanied - indeed encouraged - by inflated salaries and ridiculous "bonus" payments to bankers. When the inevitable "feco-ventilatory intersection event" occurred, these same bankers then turned around and expected to be rescued from the consequences of their folly.

As Friedman & Kraus point out

... [these views have] immediate and important consequences. The informed public's impressions of the crisis are based in part on journalists' and scholars' hasty pronouncements. These impressions have now hardened into convictions. Political movements of the right and the left are already acting upon dogmas about the crisis that have little or no basis in fact, and policy changes have been made on the basis of these dogmas.

They go on to pick apart systematically the most popular U.S. explanations for the Crisis - which overlap with the most popular in Ireland, too - test them against the facts, and, one by one, discard them as unsatisfactory. (The authors might put it more strongly than that).

For example, they show that, as indeed in Ireland, the banks that failed most disastrously were also the ones led by men whose personal shareholdings were highest. This is counter-intuitive, as well as inconsistent with TSN.

They also show, in what they appear to regard as their most controversial finding, that the banks consistently chose security over high returns. This, too, is inconsistent with TSN, which takes it as axiomatic that "moral hazard" wreaked havoc by encouraging executives to take excessive risks, since it was (supposedly) a "tails I win, heads you lose" situation.

"The Right Kind of Regulation" ?

The book authors go on to propound their own explanation, which could be briefly summarised as

it was the Basel rules wot done it.

That is their précis, not mine. (The wording is not theirs, though).

And, more fundamentally,

the crisis was caused by ignorance on all sides.

That ignorance was not necessarily attributable to incompetence or similar faults. Nor was it otherwise culpable: it was a consequence, possibly not completely avoidable, of the complexity of the systems which had to be understood, and managed. Friedman & Kraus describe it as "radical ignorance".

In doing so, they "take a pop" - one of several, mainly at him, but at the economics community generally - at Joe Stiglitz, the Nobel laureate:

Essentially, his solution to this problem is consistently to downplay the possibility of human error - that is, to deny that human beings (or at least uncorrupt human beings such as himself) are fallible. ...

Simply turning over all power to a Nobel laureate economist such as Stiglitz is no answer. There are many Nobel laureate economists, and they quite frequently disagree with one another. Which one of them should be the economist-king who will ensure that regulators do not make even worse mistakes next time ?

...If economists are our most important advisers, but their world-views have no place for genuine human error, we are in deep trouble

While the book is about only the U.S. dimension of the crisis - the authors say that all the data available there is not available for Europe or elsewhere - I believe that the basic analysis is accurate for Ireland as well.

What we have (or had) in common was an unquestioning belief that property values could never fall significantly. While I was previously aware of this fateful delusion, this book has brought home to me more than before the extent to which the Basel rules not only sanctified it, but incentivised banks to become more property-focussed.

In view of where we are now, the fact that the same conventions, in effect, also encouraged banks to over-lend to badly-run sovereign states is noteworthy as well.

Remembering that our own Nyberg report laid so much emphasis on the role of "group-think", the book’s observations on what it describes as "homogenisation" as a necessary effect of regulation are thought-provoking.

Another insight which merits attention, and helps to explain why "the bail-out keeps clocking up the billions", is the inappropriateness of the term "cushion" to describe minimum capital standards for banks. As the authors say, "hard-floor" would be a more accurate short-hand: as soon as a bank hits that level, those in control are in imminent peril of losing that control. They are naturally, and this is the intention, impelled to either raise fresh capital or to shrink loan-books.

That looks fine in theory, and may be considered to work well for a crisis confined to a single bank. As we have found, it does not work well in circumstances when there is a system-wide, and international, problem. In that situation, it is illusory to suggest that borrowers can repay quickly (or perhaps at all), and this will be so well-known that the normal suppliers of capital will not re-capitalise lenders.

In another finding which TSN ignores, Friedman & Kraus point out that

even the commercial banks that actually became insolvent had significantly higher regulatory capital levels than required by law

It is difficult to quarrel with their observation on that, viz.

This suggests that the chief cause of their insolvency was not (as a rule) deliberate risk taking but ... risk taking in which the bankers were ignorant of the true level of risk

I do not agree with every judgement of the authors. For example, contrary to their view, not every economist - and none of those who taught and still teach me - believes that any economist has precisely modelled reality. Also, while generally correct as to it having a major direct role in causation, their implicit view that remuneration models were of no relevance at all is one that I am not yet prepared to accept. As Steve Randy Waldman remarked recently on Twitter:

to the frustration of social scientists everywhere, a thing can be an important factor yet neither a necessary or sufficient cause...

Nevertheless I am grateful to them for their scholarship, and for their clear presentation of it, to which I cannot do adequate justice in a short review.

I heartily commend this book.

David Drumm's Interview with Niall O'Dowd

On the wonderful website The Irish Economy, I made a number of contributions in the Comments section following a post on the above subject. A commenter called Bklyn_rntr responded to me (and to others) on November 28th last and again early on the following day. As the comments to the post in question had already gone on for too long, I promised to respond here and I belatedly do so now.

I shall address his points in the order in which they were made.

...Anglo had only one reasonably effective system for managing risk and that was to insist that loans granted MUST be deposited with the bank. Indeed, a minimum deposit was required or the loan would become callable. In 2008, apparently, when Lenihan was presented with a series of choices surrounding the guarantee, he chose to guarantee everything AND to allow deposits to be withdrawn, including those subject to the minimum deposit requirement.

I don't believe that when considering, and deciding upon, the Guarantee, the then Minister or anyone involved would - even if they knew about them, which I also doubt - have had the position of such security deposits in mind. If the suggestion is that Anglo management later released such security without repayment of the loans, then I will await sight of the evidence that this happened before commenting.

...if you want to demonstrate your superior legal skills by offering a definition of treason, feel free. I don’t pretend to have training here. However a dictionary says it is acting to weaken or harm your state or sovereign or offering help or succor to your country’s enemies. Well, IMHO, foisting what were clearly private sector losses onto the sovereign in order to protect the banks of Germany and France, was an act that weakened Ireland.

Compliment acknowledged, but I don't think that it requires legal training to appreciate the fact that to speak of treason is out of place here. Indeed, working out what constitutes the offence in the modern world caused grave difficulty as far back as 1916, when Roger Casement ended up being "hanged by a comma".

If a country is at war with another, someone who aids the enemy might be reasonably described as a traitor. At a stretch, one might also so refer to someone who works to replace, by force, our democratic constitutional arrangements with rule by one man, or by a small group, accountable to no electorate.

In both cases, the intention of the traitor to actually bring about the bad results would have to be an essential ingredient of the offence. One is not validly called a murderer automatically just because one is the cause of someone's death. It can be an accident.

I might agree with the opinion that the actions of many people - from all walks of life, not merely politicians and bankers - have, with the benefit of hindsight, damaged our state. Unless it can be shown that they did so with that intention, it is not just inaccurate but ludicrous to speak of what they did as criminal in any sense, never mind treason. And we are not at war.

Of course, I realise that many serious people, not excluding better lawyers than I, will speak in those terms in informal social encounters, but they will not do so in a serious context such as the present one.

If anyone really believes that people like Seán FitzPatrick, David Drumm or Brian Cowen took the disastrous decisions that they did with the intention that they would damage Ireland and/or aid the country's enemies, then it is long past time for evidence of such intentions to be produced. I have seen nothing which has even tended to constitute such evidence, and those who keep muttering about it are, it seems to me, living in a fantasy.

...it is shocking to think that concealed management loans, back handers, irresponsible lending practices, nefarious share support schemes were, and I suppose are still, legal...

None of those things have ever been or are "legal". (It might be useful to know, though, whether we share the same understanding of the terms "irresponsible" and "back-handers"). I don't understand Sarah Carey to suggest that she disagrees. What I understand her to be saying is that, because so many of the crimes alleged happened with the apparent connivance of the authorities, the miscreants can't and won't be prosecuted.

The world still spins on its axis in the same way, and accordingly I disagree with Sarah, but she has a valid point. Just ask yourself if a jury would convict Willie McAteer if they believe - I am not sure that I do - that he was actively encouraged ("Fair play to you,Willie") by the Financial Regulator to "window-dress" Anglo's balance sheet. And would a jury convict Kevin Cardiff of conspiracy if he persuaded the jury members that he sincerely believed that the interests of the State required him to do what he did ?

And that those who ran the country into the ground (public and private sector) are ... given an opportunity to state their side of the story to an obviously sympathetic journalist is shocking to me.

Sigh.

How are we to judge whether these people are really responsible if we object to hearing their side of the story ? Even if some issues of their responsibility may be clear by now, there is still a lot that they can explain. I would like to hear them do so.

In this case, a provocative interview with one of the most spineless, grasping thieves, and I will say it again, a traitor to boot is really too much to bear

Contact me if you have the evidence for those accusations, and I will help you to bring a prosecution yourself, if it can be done. I will not be holding my breath while I wait.

And "what about" sentences won’t do to justify why NOBODY, including this traitor, has been called to account

There haven't been any "what about" arguments made against your position, as far as I can see.

(By the way, I also participated starting here in the discussion about the same interview on the rather good Namawinelake website).

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.

More on the Troika and Bonds

My last post was found unconvincing, even - shockingly ! - by some lawyers . So, I need to elaborate further on my case.

Before I start, I should again attempt to make it clear what I am, and am not, saying.

I am not arguing that there is a term in the Troika documents which explicitly (or even implicitly) provides that any particular debt of any bank must be paid in full. To the contrary, there are a number of references to the option of not doing so.

What I am contending is that, under the Troika agreements, the decision on whether to pay is not for the Irish Government alone, and that the consent of the Troika fairly clearly was not forthcoming for anything less than a full payment of Anglo's "billion-dollar bond" last week.This news story from last June would appear to bear that out. Note in particular the last paragraph

On the issue of plans affecting senior bondholders at Anglo Irish Bank, Mr Van Rompuy said he 'took note of it' but this could happen only with consultation and negotiation

See also this story, also from June 2011, featuring a rather significant comment

The European Central Bank has opposed any moves to force losses onto senior bank bondholders and Ireland won’t act unilaterally, Deputy Prime Minister Eamon Gilmore said today.

In that sense - and that one only, I think - the payment is required by the "bail-out". Without the "bail-out", the Irish Government would have had a freer hand, although the fear of causing difficulties for the continuation of ECB liquidity support for the banking system would have been a significant constraint on that freedom.

I propose to elaborate further by way of some "big picture" points, followed by some detailed citation of the publicly available documentation.

Big Picture

1. If the "bail-out" deal does not give the Troika a veto over significant financial/economic decisions, just why were we all so upset at having to accept it ?
2. Specifically, why did the late Brian Lenihan express his disappointment with the deal vis-a-vis "burning the bondholders" ?
3. Although it is not a view universally shared, the deal explicitly names the banking crisis as the root problem of the economy. That being so, is it plausible that the Troika would not require a say in the detail of its resolution, and for this "say" to be written-in ?
4. The Troika is composed of the IMF, the ECB and the EFSF. While it is of course conceivable that the Troika could split, there is no sign that it has done, and there is reason (see my earlier post link) to believe that there is less disagreement on this issue than assumed by many
5. The ECB's view on the issue of "burning bondholders" hardly needs further discussion: to put it mildly, it is agin it. Is it conceivable that it would not write-in a veto (or something resembling it) ?
6. It has been suggested that the issue of bonds was, at best, peripheral to the "bail-out" negotiations. Au contraire, it was, I believe, the "elephant in the room", though perhaps not the only one. How else to explain Brian Lenihan's comment ?
7. Above all, the main obstacle to believing that the "bail-out" and the bond payment are unrelated is the lack of any credible alternative explanation for the failure to impose a "hair-cut" on the bondholders.

Deal Provisions

The version of the "bail-out agreement" from which I will be quoting is this one (PDF) from the Department of Finance website.

Please note these provisions

• The Irish authorities ... will stay in close contact and consult with...the ECB... on the adoption of these measures and in advance of revisions (page 4, paragraph 10)
• To this end, by end-January 2011, we will submit to the European Commission a revised proposal developed in collaboration with IMF, to resolve Anglo and INBS (page 11 paragraph 10)
• The quarterly disbursement of financial assistance from the European Financial Stabilisation Mechanism (EFSM) will be subject to quarterly reviews of conditionality for the duration of the programme.(page 22, second paragraph)
• In the context of the above strategy, a specific plan for the resolution of Anglo Irish Bank and Irish Nationwide Building Society will be established and submitted to the European Commission ... This plan will seek to minimise capital losses arising from the working out of these non-viable credit institutions.(Page 25)

I think that the cumulative effect of these provisions is clear enough. Yes, I agree that the language is not very strong, or particularly "tight", but it is the same tone throughout the documents, on all areas of policy. The Troika can speak quietly because it carries a big stick.

Footnote

An interesting consequence of the repayment of this unguaranteed bond issue is to undermine the importance of the infamous "Bank Guarantee" of September 2008 in the evolution of the Irish bank crisis. One is prompted by recent events to doubt whether the ECB would have permitted bank defaults, even without the Guarantee.

A Gimlet Eye on the Troika Agreements

(Don't shoot this messenger again, please ! I am describing, not defending, the "bail-out deal")

This post is written in response to the continued suggestions from members of the Irish media, political class and economists (e.g. Namawinelake, Professor Brian Lucey, Stephen Donnelly T.D.) that the redemption at par of the senior bonds - neither secured nor guaranteed, be it noted - issued by Anglo-Irish Bank was not required by the terms of the so-called "IMF bail-out".

Before showing (as I hope)that this view is grievously mistaken, I must observe that I find the prevalence of this view, and the vehemence with which it is held, rather surprising. It seemed to me - even before I read the documents - that nothing could explain the Government's persistence with the payment, other than external compulsion. It also was my impression that submission to the bail-out terms was widely accepted, and indeed lamented, in the same quarters, as removing our freedom of decision in such matters.

The Agreement

Ireland's agreement with the Troika - commonly mis-described as "our IMF bail-out" - gives the latter, of which the ECB is one member, a veto over any plans to "burn bondholders".

See paragraph 10 et seq. of the first attachment to this letter (it's on page 5 of the PDF) sent by Lenihan & Honohan on December 3,2010. It is a crucial part of the "bail-out deal" architecture. By it, Ireland has committed to agreeing its plans in the relevant respects, including "burden-sharing" with bank creditors, with the Troika.

The word "veto" is not used. It does not have to be. Failure to approve has the same effect.

Now, there are those who are suggesting that our government has not tried, and that if they only tried hard enough, the ECB would "cave-in" and agree to "burden-sharing" a.k.a "burning the bond-holders".

I have no personal knowledge of whether such suggestions have any basis in reality, but I have noticed that Messrs Kenny, Gilmore and Noonan have claimed to have discussed the question with M. Trichet. I have also noticed a lot of abuse directed at Trichet because of his alleged obdurate refusal to countenance any suggestions that the ECB should relax its opposition to bond "haircuts".

I also note that, contrary to views expressed in many quarters, the IMF is none too keen, either. See p.23 of this PDF at paragraph 34, third bullet point (and especially the last sentence).

It does not look to me as if the necessary approval is available from the Troika just now, whatever the future may bring. What leverage do we have to persuade them to a change of mind ? As long as our borrowing requirement is circa €15 billion, not a lot, in my view.

But what do I know ?

Update on Monday, November 7, 2011 at 06:11PM by Fergus O'Rourke

I repeat that I am not defending the "bail-out" terms. I share the views of Martin Wolf.(Gavyn Davies says the same thing in a different way).

Update on Sunday, November 13, 2011 at 12:04PM by Fergus O'Rourke

I have elaborated further later post here

Carswell in 60 seconds

Simon will probably be able to digest this in a minute "flat", but no-one else should be upset if it takes them longer than that ! The title originally referred to how long my first draft took to sketch, but to finish it consumed much longer than 60 seconds.

Here is my reaction - it's not really a review - to Simon Carswell's Anglo Republic.

• The crux: Anglo directors were agreed in 2004 that the exposure to development property needed to be reduced sharply, but because the bank lending staff were "deal junkies", they ...just...couldn't
• Another explanation: Chairman Gerry Murphy said in 1995 that the aim was 30% p.a. growth. New C.E.O. David Drumm repeated this target in 2004! Large property deals were the most, um, effective route to this goal...and took the bank over the precipice
• Something that might surprise you #1: Seán FitzPatrick did not like 100% (LTV ratio) loans
• Quotation from FitzPatrick: "We never employed people to tell us why we shouldn't lend" - a bit of an exaggeration, but only a bit
• More crimes were committed during the final slide over the precipice than have previously been revealed
• As the growth "snow-balled", anything, including prudential procedures, that slowed loan approvals was characterised as "inefficient" and was dismantled, wholly or partially. Not a thought seems to have been given to macro issues of sensible lending - all "turnover vanity", little "profit sanity", so to speak. In time, no-one was left who was likely to shout "stop !" or even to hesitate to lend more
• Something that might surprise you #2: Anglo's expense ratio was only one-third of the industry average
• It is tempting to see Seán Quinn as the "real villain", but Anglo was "going down" even without his astonishing shenanigans
• Anglo - other Irish banks too - was full of people with business degrees who had trained as accountants (as opposed to bankers or economists) and who saw banking as "just selling money"
• In early 1990s, 90% of Anglo lending staff were ex-AIB
• Something that might surprise you #3: there was really no "special relationship" with Brian Cowen, or even with Fianna Fáil in general
• At least after the departure in 2005 of Tiarnan O'Mahoney, the funding discipline, such as it had been, disappeared
• The biggest omission from the book: there is no detail on how the loans to Mr FitzPatrick were actually approved e.g. who did the due diligence (if any) ?
• I was surprised at the description of personal guarantees as an "Anglo trademark". During my banking days, which ended in the mid-1980s, they were more associated with my employer, Industrial Credit Company (as it then was named). There was constant pressure on us to abandon the requirement, not just in individual cases but in principle, and by 1985 seeking them was much less prevalent as a practice. How did Anglo get away with it so easily ?
• Something that might surprise you #4: The Financial Regulator was not completely useless: at several points, he obliged Anglo to modify its behaviour

The reasons for Anglo's specific route to disaster viz.

1. the lenders' addiction to deals
2. the ludicrous growth ambitions
3. the weakness of the funding function
4. and (my own gloss) the overall shallowness of the corporate culture

prompt the (for me) obvious question to those directing the other banks, and especially AIB Group

What's your excuse ?

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.

Boston vs. Berlin: "Blame-Game" Episode

Mary Harney, for good or ill one of the most influential figures in Ireland's political life over the last 30 years, said in a 2001 speech which is still debated

As Irish people our relationships with the United States and the European Union are complex. Geographically we are closer to Berlin than Boston. Spiritually we are probably a lot closer to Boston than Berlin.

Now, I offer you more grist to that particular mill.

"It's The Economy, Dummkopf"

In the latest entertaining (but, um, scatological) article by Michael Lewis for Vanity Fair entitled as above, our old friend gives us much interesting detail on cultural differences. Read the whole thing; there is more in it than I can possibly précis for you. However, partly but not entirely because of my current series of posts on a related theme, I found this observation especially interesting:

The American bond traders may have sunk their firms by turning a blind eye to the risks in the subprime-bond market, but they made a fortune for themselves in the bargain and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly $100,000 a year, with, at most, another $50,000 bonus. In general, German bankers were paid peanuts to run the risk that sank their banks—which suggests they really didn’t know what they were doing.

Reference to $150k p.a. as "peanuts" may be offensive to some, but in this context, is not hyperbolic: some American traders were paid millions, to sell what turned out to be "toxic" products, and for which in Lewis' telling, the less well-paid German fund-managers were actually the "ultimate patsies". He goes on:

But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former C.E.O. of IKB, Stefan Ortseifen*, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros.

The emphasis is the author's, who thereby reminds us of American financial entrepreneurs who have made more than $805 million from similar activities.

Ironic or .. ?

In summary, in "Boston" people made millions by selling toxic stuff to relatively underpaid, naive, people in "Berlin". The latter, arguably victims of a kind, are the ones threatened with jail. In Ireland, my impression is that those doing most of the similar threatening tend to be those on the "Boston" side of the debate.

*Mr Ortseifen was charged and convicted, not of "losing billions" (though his firm, Lewis says, did lose more than $15bn under his leadership), but for allegedly making a false statement to the market. The conviction looks rather unsafe to me (for whatever that is worth), and I understand that it is under appeal.