Tom Sorell looks at the roles of some players in the financial crisis, as part of a larger project with James Dempsey about the attribution of responsibility and blame in the events leading to the crisis.
Can we hold individuals and institutions responsible for the financial crisis? There are institutions which clearly failed on specific dimensions, such as the Federal Reserve and many banks which failed to understand the risk attaching to certain financial instruments. Some of these misjudgements appear to have arisen through misinformation within organizations and sometimes through flawed accounting. Regulators, especially in the USA, appear to have suffered from a dogmatic attachment to laissez-faire in the financial markets, while those targeted by the banking lobby perhaps failed to hear – or give sufficient credence to – voices on the side of investor and consumer protection.
Institutional responsibility cannot be the whole story, however, because many poorly judged policies were championed by powerful, established individuals in banking and politics. These people initiated or gave backing to policies that went wrong; they overruled dissenters, and they dismissed the concerns of those who worried about too much investment with borrowed money, and too much exposure to real estate and real-estate backed securities.
For example, Richard Fuld of Lehman and Sanford Weill of Citicorp both spent years expanding their respective financial institutions; Stan O’Neal, who led Merrill for a relatively short period, fired thousands of employees, replaced many of its top executives, and promoted highly-leveraged investment and large positions in securitized real estate products. He was not single-handedly responsible for all Merrill’s woes, but neither was he a minor agent. Even though the crisis did not reach its peak while he was in charge, his actions as leader contributed to Merrill’s weakness when the crisis came. The same is even more true of Fuld, and others.
Although corporations have the kind of organization, hierarchy and deliberative powers that permit ascriptions of responsibility to them and not just the individuals who work for them, it does not follow that, when institutions are responsible, they are responsible to the exclusion of individual responsibility. On the contrary, in corporations where top executives are given considerable discretion to plan, hire, fire, and invest, both the organization and individuals at the top merit both praise and blame.
Admittedly, it is not only those at the top who carry responsibility for the financial crisis. Some people at the bottom of the economic ladder, for example those with low incomes who knowingly took out loans they knew they could not repay, also played a role. So did people in the middle who over-leveraged their assets in order to profit from rising house prices or to finance present consumption. Still, there is a difference between the irresponsible people at the bottom and those at the top. The ones at the bottom bore the consequences of their imprudence by losing their homes and their access to credit. Even those on low incomes who did not borrow irresponsibly have suffered, as the public money that went to repair the financial system has depleted the resources available for the welfare state. Hence, on average the imprudent subprime borrower on a low income has been punished considerably more severely by the financial crisis than irresponsible bankers.
By contrast, the leadership of large banks has suffered little more than public disapproval and occasionally the loss of jobs that were not their only source of income. Even top bankers who were fired remain extremely wealthy. Among the relatively well off who have reason to resent the bankers are middle class people whose pensions and other investments lost much of their value through no imprudence of their own; managers and employees in sound small businesses who are affected by the continuing credit shortage; and unemployed but well educated young people whose prospects have been worsened by a lasting economic recession in the whole of the developed world. These people, when combined with the worst off, may not add up to 99 per cent of the population, as the Occupy movement claims – but they are numerous and have been significantly harmed by the financial crisis.
Should there be punishments for people who mismanage banks to the extent witnessed in 2007-8? A recently proposed criminal offence of recklessness in the management of banks is certainly defensible, particularly for those high up in the management of “systemically important” institutions. So are much higher personal fines than those so far imposed in, for example, the HBOS case. The justification for these measures is sometimes obscured by talk of a rotten “culture” in banking. Talk of a bad ethical culture is intended to make the point that a certain form of behaviour is widespread, but it has the danger of insulating those who had or have a leading role from the blame they deserve for forming or condoning that culture.