Jail the bankers!

But not a single banker has been arrested for trashing the economy.

They could be. There is a criminal offence of “fraudulent trading” contrary to s993 Companies Act 2006.  This occurs where a person (usually a director) is “knowingly party” to the business of a company being carried on “with intent to defraud creditors” or “for any fraudulent purpose”. Fraudulent trading necessarily involves dishonesty. The maximum penalty for fraudulent trading is 10 years imprisonment.

Our main banks were, we now know, known to be insolvent in 2008. Their auditors had to seek government assurance that there would be a bail out to ensure they could sign off the accounts as going concerns. They have admitted this in the House of Lords.

And the government promise of a bailout meant that they were not insolvent, doesn\’t it?

Before that assurance was given the banks had the liabilities about which the auditors sought assurance. They were therefore trading during that period knowing they could not meet their obligations. That resulted in their creditors being defrauded – we paid the bill as a country and the government was undoubtedly a creditor at the time. The government could rightly bring the charge against the directors involved, in my opinion.

But they have chosen not to do so. Why?

Because the crime is knowingly trading while insolvent. And as we know, the banks actually thought they were doing just fine. Up until the day they realised they weren\’t.

Stupidity, ignorance and or error are not crimes.

12 comments on “Jail the bankers!

  1. Quite so. What would Ritchie have had the banks do? Stop trading immediately they became aware of the problem? How would that have helped?

  2. They are not crimes but they are damn good excuses – “we sincerely believed he had WMDs”/”didn’t know our police were dissecting people”/”thought that was a legitimate expense” etc etc

  3. You understate how much the article is incorrect.

    If a director was aware their bank was insolvent (and likely some were) they likely obtained legal advice as to whether they could properly continue to act as director without putting their bank into liquidation – they would have been fools not to have done so.

    This is just an educated guess, but I imagine the legal advice was that a liquidation would result in a catastrophe for creditors and therefore wrongful trading should not arise low (let alone fraudulent trading).

    Indeed, for those banks that were insolvent, the directors would have owed a fiduciary duty to the creditors (and not the shareholders). If so, ceasing to trade, putting the bank in administration/liquidation etc would have been a breach of fiduciary duty and could have rendered the directors personally liable. Even resigning (which would otherwise be tempting for a director in this position) could be a breach of fiduciary duty.

    Only if a director knew the company was insolvent and knowingly worsened the position of creditors would he be criminally liable.

    So, yes, this was an amazingly ignorant article, which got the legal and practical position of directors of an insolvent company 100% wrong. It’s almost as if the author has no experience of the commercial world, but confidently asserts expertise in areas where he has none.

  4. It’s almost as if the author has no experience of the commercial world, but confidently asserts expertise in areas where he has none.

    When I was in the army it was a well known aphorism that if you were going to talk bullshit you had to talk it confidently.

    Since leaving I have found it applies to a certain class of consultant, especially management consultants.

  5. “Stupidity, ignorance and or error are not crimes”.

    Except, of course, if you are driving a car … or running a factory, for that matter … er … I didn’t know that press had to have a guard, guv!

  6. Murphy banging on about the legal consequences of knowing misrepresentation in the furtherance of commercial activities is a bit of a hostage to fortune. Given all the shit he spouts, if he were held to his own standards, his only defence would be, “your Honour, I didn’t know I was spouting shit at the time.”

    Bailliff, take him down!

  7. Ritchie has presumably not read the report by Darling’s appointee, Mr Caldwell, which asserts that the net assets of Northern Rock exceeded its liabilities by £2.5bn at the time when it was nationalised without compensation or the audited accounts of Lloyds Banking Group which states that HBOS was worth £11 billion more than they paid for it (after kitchen-sinking the asset values, the first estimate was £15 billion).
    Alternatively Ritchie has a different definition of “insolvent” from the rest of us.

  8. The banks were never near to insolvency in the terms set out in the Companies Act. The Tier 1 capital requirements ensure that is almost certain to be the case. The reason for the bailout was to ensure that they could carry on trading as banks and comply with their capital requirements.

  9. @ Alex
    You are very nearly right.
    Actually the reason was that Darling’s Treasury suddenly decided that the level of capital backing demanded by Brown’s Treasury was inadequate and that every bank had to raise its capital ratios with no advance warning. Even after heavy write-downs on property lending nearly all of them had a margin over the capital requirements in force the previous day (contrary to tabloid journalists’ opinion, most bankers aren’t idiots). So “new, increased” needs to be inserted in your last sentence between “their” and “capital”.
    Darling demanded that the big banks raise more in capital in one month that the London Stock exchange had raised in the whole of the previous year – so their shareholders just didn’t have enough spare cash and the Treasury bought shares at a massive discount to net asset value per share.

  10. FYI
    Ritchie’s last comment on that blog is lying through his teeth and he has suppressed my answer pointing that out. Cash is not the same as cash flow.
    But that just demonstrates his intellectual dishonesty

  11. John, you are quite wrong about Northern Rock. It was on a one way trip to insolvency – its short term funding matured at a time when the bank would not be able to raise funds to repay it (as the state of the markets meant it could neither borrow nor sell its assets for an adequate price). It only survived by borrowing on an emergency basis from the Treasury. You can certainly argue this was a mistake, and that Northern Rock should have been allowed to fold. But to say that the Government should have remained as a lender of last resort, bailing out shareholders and bondholders, is bizarre – socialised risk, indeed.

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