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Another View: Bankers who behave badly must be personally accountable

Five years after the world’s financial system began melting down, consumers, homeowners and taxpayers remain frustrated that no banking bigwigs went to jail.

The reasons are many, including that specific misdeeds couldn’t be pinned on higher-ups and that prosecutors got cold feet after early fraud cases resulted in acquittals.

The popular desire to put those in charge behind bars is understandable and unlikely to abate, given last week’s arrest of a former Citigroup and UBS trader accused of manipulating interest-rate benchmarks. At the same time, prosecutors are required to prove willful intent, beyond a reasonable doubt, to violate specific laws. Almost wrecking the world economy is a very bad thing. But it is not in and of itself illegal.

So, what can be done when bankers, knowing they can’t be punished for what they don’t see, purposely don blindfolds? Or when banks are caught breaking the rules but are allowed to pay large fines (which punishes shareholders, not executives) to settle civil fraud cases without admitting or denying guilt?

Those are the questions Britain’s Parliamentary Commission on Banking Standards and the Securities and Exchange Commission sought to answer last week. Their answers flow from different legal, political and cultural conventions, yet they arrive at the same correct conclusion – when banks behave badly, someone must be held accountable.

The forensic analysis by the British commission of what ails the banking industry is a tour de force. One of the most dismal features that emerged from the evidence, the report states, was the absence of any personal responsibility for widespread failings and abuses.

Failings in banking have a disproportionate impact on the world economy. And the lack of clear lines of responsibility allows bank executives to claim the “Murder on the Orient Express” defense – everyone was party to the decision, so no one can be held to blame. This was the case in the Royal Bank of Scotland’s implosion and, in the United States, the collapse of the mortgage market.

To prevent such behavior, the commission would require banks to assign crucial responsibilities to a specific individual, so if an enforcement action is brought against a bank, regulators would know which senior people should be held responsible.

The commission also proposes a couple of novel ideas to help regulators enforce the law. First, it would shift the burden of proof in some cases so that bankers would have to show they took positive steps to prevent wrongdoing. It also recommends a new crime of “reckless misconduct in the management of a bank.”

The legal community’s immediate response: It’ll never work. How would you prove, for instance, that a man who received a knighthood for his achievements in banking was also behaving in a criminally reckless manner? One answer: Don’t be so quick to knight bankers who engage in dizzying expansions with huge amounts of borrowed money and minuscule amounts of capital.

There is a corollary. If a bank can settle a securities violation by paying a fine and without admitting to wrongdoing, it will commit the same violation over and over. This has been true through decades of SEC cases. Now Mary Jo White, the new chairman, is signaling that she will approve fewer of these kinds of settlements.

The changes the British commission and the SEC propose are not without controversy. But the benefits – fewer global financial crises, less severe recessions, lower unemployment – vastly outweigh the risks.

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