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Insight: A matter of retribution
Financial Times
03-Sep-2009
By Gillian Tett
How many financiers
do you think ended up in jail after America's
Savings and Loans scandals? The answer can be found in a fascinating,
old
report from the US Department of Justice*.
According to some of its records, between 1990 and 1995 no less than
1,852
S&L officials were prosecuted, and 1,072 placed behind bars.
Another 2,558 bankers were also jailed, often for offenses
which were
S&L-linked too.
Those are thought-provoking numbers. These days the Western world is
reeling from
another massive financial crisis, that eclipses the S&L
debacle in terms of wealth destruction.
Yet, thus far,
very few prison terms have been handed out. For sure,
there have been a few high-profile dramas. Bernie Madoff is one,
obvious,
example.
But one reason why the Madoff drama has grabbed so much attention and
already sparked a slew of books this
month, is precisely because there
are precious few other financiers behind bars, or facing momentous
fines. Compared
to the S&L days, the level of retribution so far seems
almost non existent.
Why? In part, it may be a matter
of timing. The wheels of American
justice often grind slowly, and many cases are now passing through the
system. Navigant,
a financial consultancy, for example, says that
private investors have filed more suits against financial companies in
the
last two years than they did in the S&L days. And some are now
seeing the light of day.
Yesterday, an American
judge rejected attempts to block a lawsuit
lodged by Abu Dhabi Commercial Bank against Moody's, Standard & Poor's
and
Morgan Stanley - meaning that case, which involves structured
notes, will soon get underway. Separately, federal investigators
have
opened inquiries into at least 25 companies, including Lehman, AIG,
Fannie Mae, Freddie Mac and Wamu.
Yet,
in private many lawyers, and some government officials too, seem
pretty cynical about just how many jail sentences or fines
these
initiatives will produce. In part that is because of the sheer
complexity of the financial deals in the recent
crisis, and the fact
that these deals were often deliberately and cleverly constructed to
"arbitrage" the law (ie skirt,
but not break it).
Another big issue is the sheer number of powerful parties that
typically participated in complex
finance deals. Few private law firms
have the resources or desire to go head to head with numerous Wall
Street banks
at one time. And government agencies are often short of
resources too, partly because some, such as the FBI, have been
forced
to divert staff in recent years to terrorist financing issues.
However, another key problem is a lack of
knowledge in Western courts
about complex finance. That makes it time-consuming to hear cases. It
also makes verdicts
unpredictable.
Some senior figures in the financial world are looking for solutions
to this. Jeffrey Golden, a prominent
lawyer who helped to create the
modern derivatives world, for example, thinks there is an urgent need
for a specialist,
cross-border financial court (in much the same way,
say, that there are specialist family or trade courts.) This, he
argues,
could be staffed by former derivatives experts and lawyers,
since these not only understand finance but also have a vested
interest
in ensuring that their beloved derivatives business is built
credible foundations.
But there seems limited chance
that Golden's sensible suggestion will
fly soon. Right now, in other words, the Western financial system is
stuck with
a legal structure that seems ill-equipped to cope.
And that is worrying on several levels. On a personal level, I have
little
taste for seeing hordes of bankers heading for jail, or facing
massive fines. Nor do I have any illusion that public or
private
prosecutions will resolve bigger structural flaws. A witch-hunt might
be a media distraction.
But, on
the other hand, if there is no retribution against financiers,
it will be very difficult to force a real change in behaviour.
After
all, no amount of twiddling with Basel rules or pious statements about
bonuses will ever scare a financier as
much as the thought of jail.
Moreover, without some retribution it will also be hard to persuade
voters that finance
is really being reformed, or has any credibility
or moral authority. That is bad for politicians and regulators.
However,
it is also bad for bankers too. So, in the months ahead, keep
a close eye on what happens to the legal cases in the system
and,
above all, watch to see just how many do (or do not) quietly die,
compared to those S&L days.
*DoJ,
Financial Institution Fraud special report, June 30 1995; cited
in The Great Texas Savings and Loan Financial Debacle;
By Tom S. King
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