Friday, October 17, 2008

Justice and Junk

Andrew Hill in the FT on the matter of the bonuses of bankers etc - 'The US and the UK have two objectives: to curb future recklessness and - a less worthy aim - to punish past excess.
So I get hold of a written-off car. I patch it together to look like new, even though its chassis is held together by duct tape. I create a fake registration and sell it. I would, if caught, be charged and imprisoned. My pleas that everybody else was at it and, anyway, the car registration documents were too easy to fake are rightly ignored.
Or I am a banker. I buy in a load of very dodgy mortgages. I turn them into shiny new securities. They are held together by duct tape, but they carry the credit rating of my bank. I then sell them. If caught, my pleas that everybody else was at it - the Nuremberg defence -  and, anyway, government regulations were too lax are wholly accepted and, even though my actions have helped impoverish the world by $50 trillion and have thrown millions out of work, punishing me is not regarded as 'worthy'. In fact, you'll give me billions to keep me afloat because, having effectively turned all banks into one bank that cannot be allowed to fail, I have you over a barrel.
There is only a slight moral difference between 'chopping' a car and securitising bad debt. The buyer of my junk bond is likely to be smarter and better informed than the buyer of my car. But, against that, there is the fact that I don't really care any more than he does because it's all about bonuses and the chances of either of us getting caught before the year end are slim. Our shareholders are the real suckers - and the pensioners, and the dispossessed and the unemployed.
There is a pragmatic argument against pursuing mortgage 'choppers'. This is that we need these clever guys to get the system up and running again. This is like saying we'll keep the car crook out of prison because only he can help us fix the insurance/car registration system. The truth is that the City boys made such a gigantic mess of things that their judgment and experience are effectively worthless. 
There's also a political argument. Pursuing the bad guys is likely to intensify the social tensions from which we will suffer over the next few years. An amnesty is the safest solution. There is some merit in this.
My point is that, irrespective of who, exactly, was guilty of what at the regulatory and political level, nobody can seriously doubt that the banks and assorted other companies were guilty of this. In strict juridical terms, pursuing them is entirely worthy and, in fact, obligatory.  Even in political terms, it will have the beneficial effect of making banks much more cautious in the future - precisely the outcome we are now pursuing by other means. But I can see that, except in a few cases, it won't happen and I know why. This crime is just too big to prosecute.


  1. As for as I am aware the FBI are investigating, and the sentence in the US will not be a couple of years in an open jail if guilty.

    As for as I am concerned if you are too big to fail, you are too big to regulate. If you are not too big to fail you don't need regulating.

    Which means we need to break the banks up into smaller operations not build super banks like Hbos and lloyds, which will be full of political cronies and political inspired policies, and we know where that lead Fannie and Freddie too don't we?

    At the moment the lessons are not being learned.

  2. I don't think it's a great analogy, Bryan. A car-chopper's greedy and stupid actions are in no way legal and can kill people. A greedy and stupid banker is still, (whether you like it or not) acting within the law and won't kill anybody.

  3. "(whether you like it or not) acting within the law and won't kill anybody."

    SUBJECT to investigation and possible court action?

    Prosecutors Look to Enron, Refco in Subprime Probes

    This thing has a long way to run yet Sophie.

  4. I'm pretty sure that greed and stupidity aren't actually crimes (which is just as well for everyone except all these wise saints that are suddenly popping up everywhere.)

    Also, funny how you don't hear a lot about 'greed' when things are going well. Then we talk about 'efficiency' and 'improving profit margins' and 'shopping around to find the best deal' and so on.

  5. The banks collapsed because i worked in them between 2004 and 2006. i'm not sure of the exact dynamics but no one can doubt i am to blame, or rather they are to blame for treating us temps like coolies and beating us with canes every day. Sooner or later cosmic justice will pay our foes out as it has now done to the banks.

  6. Elberry, the mechanism you subjected the world too is called The.....

    Butterfly effect

    Dont do it again or Nassim will have to write another book.

  7. The one regulation I hope the gov. implements is to severely limit bonuses and severance packages to CEOs. I think if they are unable to walk away with tens of millions while their companies expire, they will do a better job of keeping them afloat.

    Bryan is right about the ubiquitousness of the problem though. Even when Spitzer was hunting down malefactors, very few of those guys ever went to trial. And then, of course, Spitzer turned out to be corrupt in his own way.

    Makes me wonder, whatever happened to Michael Milken?

  8. You give too much credit to the intelligence of securities buyers. They thought they could hedge their risks and at the same time enjoy the increased yields that those risks brought. Not very smart.

    I do think their should be a law to punish criminal incomptetence, though.

  9. "A greedy and stupid banker is still, (whether you like it or not) acting within the law and won't kill anybody.2

    Inadvertently they will bring death and misery to many through unemployment and the high crime that goes with it.

  10. You can only bust someone if they've broken the law. In the vast majority of cases what the bankers got up to may have been insane but it wasn't illegal.

    I do worry about social tensions. A stroll around some of the big estates near here makes it very clear that an awful lot of people got nothing from the recent boom. In fact, comparatively anyway, their standard of living probably fell as globalisation drove wages down. Now they are being told to pay up to save civilisation as we know it while the Aston-driving classes count their winnings because that nice Mr Brown has effectively ring-fenced them. There's trouble in store.

  11. Hi Bryan,

    You said:

    There is a pragmatic argument against pursuing mortgage 'choppers'. This is that we need these clever guys to get the system up and running again. This is like saying we'll keep the car crook out of prison because only he can help us fix the insurance/car registration system.

    While the chopping is profitably going on, those who object to it on principal, would do well to leave their companies--and often do, in droves--for new careers where they can better apply their values and maintain integrity. After all, even though they may love and have great aptitude for bankng or what have you, this business is not what they naively hoped it would be. Either this decision will take place, or these people without the stomach for chopping will be let go, or consigned to little cubicles and littler bonusses--for the most part. There are always exceptions, for example those who perform well while removed from the hub of activity, and thus able to climb the outside ladder as far as it may go.

    The great majority of people around the chopping have to agree to at least some complicity, even if it means turning the other way and minding their own now-dead end cubicle business. Here there would be exceptions as well, as with those who are able to perform otherwise very well, thus showing a better way. At the investor level, these are the "wise" people who have been coming to the fore so far, Taleb and Buffet, for instance.

    I'd be interested in some wise banker stories. This will be the best response to the argument that we need to keep the "crook out of prison because only he can help us fix the" system. After all, the system has been giving great respect for people with the chopper "personal value systems." It will be good to know we can bank without dealing with scoundrels, even if we choose the cubicle scoundrels under pressure of losing their jobs.

    The industry decided on the chopper mentality, and therefore the hiring of other like people with similar and supporting personal value systems, creating a den where thieves could hang out for bonusses and without fear of reprisal. It got rid of politcally significant people who either did, or maybe would have emphatically disagreed on principal. This shrunk the pool of potential ethical bankers.

    Therefore, the pragmatic argument ought to be that we need to find the exceptional bankers who know how to bank, and have done it above board. Cut the others loose from the industry altogether, or consign them to the cubicles they should have been in, learning sound banking practices. They weren't good enough, never were, at least not for such important business as we have to attend to now.