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

Anne Hesnan, County Meath

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.)

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

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.

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.