Emily Flitter at BankThink concisely summarizes a recent useless contretemps among conservative and liberal bloggers and newspaper columnists over a proposal by leftard Paul Collier of Pravda The Guardian to make bad business decisions by bank managers that lead to the failure of a bank a criminal offense ("bankslaughter"). Collier's idea was promoted by the often-but-apparently-not-always-sensible Felix Salmon, who stoked the ire of Clusterstock's John Carney, who, in turn, drove first-year Yale law student James Kwak to lecture all of us, based upon his vast reservoir of knowledge about the US legal system. Links to all the bloviators are contained in Emily's post.
It makes for "interesting reading," but it's a non-issue. Anyone who knows anything about the current state of the law and regulation that governs the US commercial banking system knows that the banking regulators have all the firepower they need to punish reckless bank management and directors until they cry like little girls, including stripping them naked, tying them to an anthill, cutting off their eyelids, and pouring honey on their private parts. Then, they can get really nasty.
Regulators can issue cease and desist orders, impose civil money penalties of up to $27,500 per day, institute removal and prohibition proceedings against "institution affiliated parties" (including officers and directors), sue directors and officers personally for "gross negligence," and seize assets in prejudgment seizure actions. If an institution fails because of the type of "reckless" conduct that so irks the proponents of criminal penalties, you can bet your bottom dollar that the FDIC and the US Justice Department will be all over the management and directors with as many civil and criminal sanctions as they can concoct. Ask Don Dixon and Woody Lemons.
Any bank officer, director, or professional who survived the last banking crisis knows full well that the government has all the arrows in its enforcement quiver that it needs to theoretically deter and punish every "reckless" officer and director it can lay its hands upon. Adding additional criminal penaltiies at this point makes as much sense as all the current discussions about reducing the US and Russian nuclear weapons stockpiles. What's the difference in deterrence incentive between being able to blow up the world 10 times over versus 15 times over?
Ms. Flitter closes in on the most important aspect of the discussion, however, when she wonders whether additional criminal penalties would actually deter anyone when current penalties do not. The obvious answer is "No." The kind of people who take reckless, bank-destroying risks in one of the most heavily-regulated businesses in the world aren't the type of people who worry about the downside. Again, if you'd actually had experience in this business, and had encountered people like this previously, you'd understand all of this. If you're devoid of such actual experience, however, you can always blog or write a newspaper column about the subject, and readers who are equally ignorant might find your opinions useful.
