Jake's View

Banking scandals expose regulators who distort due process

Banking scandals expose regulators who distort due process by imposing their own penalties

PUBLISHED : Thursday, 30 August, 2012, 12:00am
UPDATED : Saturday, 01 September, 2012, 8:11am

Here we are at bank No7 with Standard Chartered, and no individual banker has been held criminally responsible, and that's a shame.
Jimmy Gurule, former undersecretary for enforcement, US Treasury,
Bloomberg, SCMP Aug 25

It would help if we had charges on which to hold individual bankers criminally responsible. Evil-doing doesn't quite cut it and holding money that may have come through Mexico isn't actually a crime.

The big offence, of course, is dealings with Iran. Here is a country that has seen its two immediate neighbours (Iraq and Afghanistan) invaded by the US military, that has nuclear-armed powers on all sides (Russia, India, Pakistan, Israel), and that thus sees some defence advantage in a nuclear arsenal.

This is a crime and London-based banks are guilty of it. A newly created New York State regulator says so. Like that other hero, Superman, he can see through walls and across oceans. His knowledge of the doings of banks in London is total.

His knowledge of the doings of banks in other states of the US, unfortunately, is less than total. Most American banks are state chartered and their state regulators won't have outsiders looking in. They see no future for themselves in undermining their state financial industries.

We thus revert to a principle of law - innocent until proven guilty. Supervision of state banks is kept light, and guilty doings are not found. These banks are therefore innocent, white as newly laundered bedsheets, emphasis on laundry. Hello, Nevada. Hello, Arizona.

It works that way in New York, too. The local banks are clean.

It's all the fault of those evil-doer London banks. Therefore, get London. Being a crusader in a New York state political office is also a traditional route to the US presidency. A city of high-minded moralists, New York, oh yes.

But there are so many avenues of hypocrisy to explore here. Let's get back to the one on which I started. Why has no individual banker been held criminally responsible?

We shall apply the scientific test of Occam's Razor here - go for the answer with the fewest assumptions. Our answer: no banker has been found responsible for the simple reason that regulators don't have the goods on any.

The thing you have to remember about regulators is that they live by scalps. They are funded by the public to hunt evil-doers and the proof of having caught one is a scalp dangling from the belt. No scalps, no money.

A scalp is better than an actual evil-doer stumbling along in chains. Evil-doers in the flesh may deny their guilt, which would be inconvenient. No scalp ever makes denials.

Take note also of another truth about regulators. Governments create so many of them these days that the ratio of evil-doers per regulator is dropping rapidly. The pickings are getting thinner.

So, the standard tactic for regulators, as pioneered in New York, is to work up an accusation of badness against a bank, any bank that is not on the off-limits list, and support it with confiscated e-mails by junior employees, which are stretched hugely out of proportion. The regulator then gathers in the media to threaten big criminal prosecution, the actual charges left vague.

Next, its lawyers engage the victim's lawyers in a game of, well … what's a nice word for blackmail?

If, for instance the victim thinks the full cost of fighting the charges would be US$500 million, perhaps it will settle for a US$250 million fine out of court. Guilt or innocence does not enter into this. It's all about cost.

If the victim still won't buckle, the regulator's next threat is criminal prosecutions of individual directors, employees and even their family members. This usually does the trick and the victim agrees.

The final deal takes the individuals off the hook, makes the victim pay a big fine and, most important, prohibits the victim from saying anything further about the case in public. This prohibition does not apply to the regulator, which can then wave the payment of the fine in public as proof of guilt. Another scalp now dangles from the regulator's belt.

But you can usually know the truth of it by Mr Gurule's complaint - no banker has been held criminally responsible. None can be.

What a shame indeed, a shame on cynical regulators who corrupt due process of law.