UPDATED: Jul. 9, 11:20 p.m.
If you're driving and happen to kill a pedestrian, you may, of course, be slapped with manslaughter charges. On the other hand, if you're running a huge financial company and your management decisions remove billions of dollars of wealth from the economy and you threaten the entire financial system, you'll receive a multimillion pay package. (See Dick Fuld, Angelo Mozilo, et al.)
Paul Collier of the Guardian has put forth a novel, if slightly gruesome-sounding, concept that's making its way through the financial blogosphere: 'bankslaughter.' The term appears to have been originated in May by Collier's fellow Guardian writer Timothy Garton Ash, who suggested "a crime of bankslaughter, comparable to manslaughter in the sense that you don't have to prove malice aforethought." In other words, the thinking goes, corporate criminal law isn't sufficient when it comes to abject recklessness and risk-taking in the financial sector. Here's Collier:
"With bankslaughter, when the bank blows up -- even if it is a decade later -- a criminal investigation traces back to determine whether crucial decisions were reckless. If a reasonable banker faced with the information available at the time would not have taken those risks, the person responsible is dragged off the golf course and jailed.
Once bankslaughter was on the books, bonuses would be less dangerous. Managers would have to weigh the balance between risk and return and take defensible decisions. I doubt hyper-caution would be a problem: the overly cautious would not get bonuses. Surely we can rely on our bankers to exhibit the necessary degree of greed."
The idea of holding executives criminally liable for bad management -- especially companies that are essentially "too big to fail" - has caused somewhat of a stir in the financial blogosphere. John Carney of Clusterstock called bankslaughter, "The Worst Idea Of The Week":
"In the first place, Collier doesn't seem to have given much thought to the costs of over-deterrence. Bank executives faced with the prospect of a criminal investigation and possible conviction would likely be overly cautious. We'd lose a lot of socially beneficially risk taking by criminalizing bank failure.
There's also a serious fairness issue. Only those executives whose risky bets blow up get investigated, prosecuted and punished. Those whose bets pay off are untouched. This means that being unlucky in the markets becomes a criminal matter. Criminality becomes a kind of lottery."
Carney brings up a good point: the criminal system isn't necessarily structured to investigate highly complex financial institutions and their myriad counter-parties (Enron appears to be an exception to this). Here's more from Carney: "Unless the crime required bankers to know they were being reckless--in which case it would deter almost no-one and result in approximately zero convictions--it would wind up punishing bankers for just being wrong."
Today, Carney, also suggested that shareholders have little or no interest in protecting themselves from risk-taking bankers -- that's the reason they invested in bank stocks in the first place. Carney's definition of a bank seems a bit out of step with most the ideas of most Main Street investors, who likely viewed banks as stable, conservative institutions prior to the financial crisis.
Reuters' Felix Salmon sees potential in the idea, however: "Is it reasonable to hold professionals criminally liable if they take reckless risks with other people's money? I don't see why not. Especially if they work at a leveraged and systemically-important institution. After all, people can be jailed for insider trading, which is far more of a victimless crime than bankslaughter."
James Kwak at The Baseline Scenario chimes in on the matter, arguing that the world financial system needs more "over-deterrence." He suggests that large financial institutions should have a way to "internalize the risk of failure in some way," but says that bankslaughter should be left to civil tort cases. Still, he's in agreement with much of Collier's argument: "In an environment where it’s very clear that managers were taking too many risks, because there was no way they would suffer the potential consequences of those risks, one very logical and sensible solution is to turn the dial partially back the other way and increase liability, which I see as Collier’s basic point."
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