Jail the Bad Bankers: A Global Movement

There is a sense of hopelessness and anger in the world, and this negative spiral needs to be fixed in order to remake our world in a more positive fashion. I believe that the world will re-configure itself positively, driven by new values. In order to change the system, we first need to dispel negativity, right some obvious wrongs, and move on from here.

The sense of anger, fortunately for now mostly latent, is sparked directly from the financial crisis. I have spoken with over a thousand people on this topic, in the US and Europe, from restaurant staff and students, to political and business leaders at Davos. Universally we are angry that the financial crisis has exposed the callousness of the risk-reward model for investment bankers, and their barely competent retail banking colleagues.

At the heart of the matter is this:

If you rob a drug store, you go to jail. If you have defaulted on your house, have no job, and are caught stealing vegetables in a supermarket, you are likely to go to jail.

However, if you are caught with 173 x $1 million checks in a drawer, and admit stealing $50 billion, you get to stay home in your apartment. Even though you have already tried to mail your belongings off to your relatives. And even after several other pyramid scheme proponents have already faked suicide, went on the run, or actually committed suicide. How can this be right?

If you have presided over a massive financial loss, of $15 billion in a quarter at Merrill Lynch and write-downs of $45 billion plus, and pay out $4 billion in bonuses for failure, you are not even forced to apologize. And don’t forget, in Merrill Lynch’s case, this is government tax payer money. And to think that these bonuses are merited because it is necessary to “retain talent” borders on fraud. Who is hiring bankers on Wall Street these days? And weren’t these people still working in the same bank that generated these enormous losses, that our children and our childrens’ children will be paying for in the next decades.

Or if you are the CEO of a major European bank, say RBS, and you swear to the markets on one day that you do not need to raise capital, and then a week later you want to raise £12bn. How can the Board of Directors and the entire management team not known that this was going to be an issue? It takes a while to draw up the numbers. In the meantime did they ask to have their shares suspended as there were material actions taking place that could disadvantage shareholders. They did not. Shareholders were mislead.

And what about golden Goldman Sachs? Just before AIG went down, their CFO claimed to analysts that there was no material exposure to AIG. The NY Times reported a week later that there was a $20 billion exposure. Goldman Sachs retaliated by saying that the report was misleading as the exposure was hedged. One hopes, for their sake, that when the discovery process of the US legal method digs into the facts, that they were telling the truth. Misleading investors is wrong, and to do so knowingly is a bad thing.

And this whole notion that businesses have become to complicated to understand. Since when has incompetence or stupidity been a defense for breaking the law? Can I claim that a speeding signpost was misleading, and that I should not get a speeding ticket. We should not accept the arguments that businesses have become to complicated as a way of letting executives off the hook. If they have created incomprehensible businesses and products, they should be responsible for them directly.

For over a hundred years, there were Debtors Prisons around the world. It is not completely unheard of to jail people for their wrong doing, and financial wrong-doing is not an exception. There is an argument to say that, in for example, the sale of near-fraudulent sub-prime mortgages, that there are too many wrong-doers to jail. Well, that has not stopped us jailing drug dealers – and many drug users as well.

The real problem is that there has been no real risk for the people who engineered the structures that has created to the loss of confidence in money. The worst that happens is that you get to keep the money from the 10-year government supported pyramid scheme (or confidence trick), you keep your $1m+ pension… and you do not have to go to work on Monday.

The worst that happens to you if you lose your job, have credit card debt and cannot pay off your mortgage? You lose just about everything.

The notion of risk-reward in the banking industry, and undoubtedly several others, is that there is no correlation between reward and real, direct personal risks. Losing your job and keeping millions is not a risk. Being snubbed at the golf club is not the same thing as enjoying the company of inmates at San Quentin or Wormwood Scrubs.

To rejoin the original premise. There are a lot of good people who are suffering. I heard today that up to 20 million migrant Chinese workers, mainly males, will be out of work. This is not a good situation for the world economy. Unemployment typically leads to social problems, crime and unrest, as we are already seeing.

If one looks at the way that a complex system works, there are patterns of behavior that emerge. My work at Imaginatik has led me to believe that the reason why patterns emerge with some predictability, is due to heuristics or rules of thumb. The reference book for this is Gut Feelings by Gerd Gigerenzer.

There are some powerful rules of thumb at play here:

  • “Follow your peers”
  • “Keep doing what you are doing unless there is a compelling reason to change”
  • “Money is good so get more money”

The banking system is flawed in its compensation design. Individuals in the system will push the limits of the system, and keep doing it, as they have little personal downside and no reason to stop.

The Jail the Bad Bankers movement is necessary because this system will continue unless there is a compelling reason to change. Already there is evidence to suggest that the bankers will rejoin their old ways. John Thaine’s move, which must have been supported by senior staff in Bank of America, to pay out bonuses just before they were acquired – paid with tax payers money – is a direct example. The bad things will happen again…

Unless there is a compelling reason for change. This is why today, with some preparation work done before, we are starting a global movement.

I do not like ‘Jail the Bad Bankers’ as a term is too narrow. There will be other business leaders who were almost pathological in their pursuit of unsustainable businesses. Rating agencies spring immediately to mind, although the auto companies who have been driving their firms to the bring have to come close as well.

Stupidity should not be an excuse. And keeping past compensation and future pensions should not be allowed. Ordinary people are paying for these mega-mistakes. There needs to be some justice.

Please share this, build on this, and get engaged in the movement as you see it grow through the social networks and physical gatherings around the world. WE can and will make a difference.

Sincerely,

Mark Turrell

CEO, Imaginatik plc

www.imaginatik.com

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7 Responses to “Jail the Bad Bankers: A Global Movement”

  1. Mark – isn’t it interesting that accountability appears not to be at work in the world where accounting is a critical feature of the industry?

    On the Emergence front, highly recommend Steven Johnson’s book on Emergence – call it heuristics, feedback loops, etc. – but there are definitely both hidden and visible mechanics at work in systems of all kinds.

    Many times the rich get richer because they are smarter and the power/money accumulates all that more quickly. Sometimes, the game is rigged.

    Let’s hope we can rewrite some of the rules of the game, before it all falls apart on us.

    Cheers,
    Dan

    • I have not read Steven’s book yet – I think it is referenced in other works, but it is always good to get to the source. I have added it to my reading list – thanks!

  2. Thanks for putting into words much of what I have been feeling! The bad bankers have broken the social contract and we have lost trust and hope in our system. It will take more than fine words and propping up the institutions that brought us to this point to restore the trust and confidence we as an international community have lost in the system. Justice needs to be served, and the indivudals and institutions that have brought us to this point need to understand that deeds have consequences.

  3. I agree with the general issues you have raised, and I will raise you one. When we discuss this issue, it is not just the bankers, they are just the most recent examples of an economic system that rewards incompetence.

    From a legal perspective, I believe that there are legal theories that would support legal action against the parties who dug this pit into which we have fallen.

    First, there are the fiduciary duties that are owed to the shareholders by the executives and the Boards of Directors (who by no means are innocent). Essentially, they had the duty to act as reasonably prudent buyers. It is not prudent to make loans to individuals who can not repay them or to purchase bundles of the aforesaid bad loans. Commonsense and due diligence would have suggested these were bad bargains.

    Second, there are the fiduciary responsibilities of the Boards who vote for the compensation packages.

    Third there are the executives of the pension and mutual funds who purchased bank shares when again common sense and due diligence would have required them to 1) refrain from the purchase, or 2) use their voting power to move the executives to better decisions.

    On a slightly different note, we need to bring the market back into the market. I have read about the idea of ‘too big to fail’. If this is a problem, fix the problem, break the banks up, make them small enough so that if one fails, it won’t shake the foundations of the economy. Let’s bring Adam Smith back into the market with thousands of smaller banks competing on a level field.

  4. good topic. i like the blog

  5. The more prominent and wealthy the criminal, the less likely the crime will be prosecuted. Most of the wealthy have their crimes sanctioned by law, and the wealthiest have their crimes subsidized by tax payer dollars.

Trackbacks/Pingbacks

  1. emmalwallace · in the observation of things - February 4, 2009

    […] The banking system needs a compelling reason to change.  Nice post from Mark Turrell. […]

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