The moral mob cannot determine fate of bankers


Darragh Connell argues that even in the current economic crisis, mob justice should not be allowed to subvert the rule of law.

THE PAGES OF NEWSPAPERS have recently been brimming with stories of payments made to bankers, regulators and industrial tycoons. Widespread anger gripped America when it was disclosed last week that the insurance giant AIG awarded retention bonuses after taking $170 billion in aid from the US Government.


aigThe bonuses were to be paid to employees in its financial-products division, the same division whose credit default swaps brought AIG to the brink of collapse. President Obama stated “under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay.”

There are a number of Irish examples of large payments recently made such as that paid to the chief executive of Irish Nationwide Building Society, Michael Fingleton, who was paid a bonus of €1 million just weeks after the Government introduced the €440 billion guarantee to protect the entire banking system. Meanwhile the former chief executive of the Irish Financial Regulator, Patrick Neary, received a severance payment of nearly €630,000 and a pension of €142,670 a year. Unsurprisingly, members of the media, politicians and public commentators have called for all these payments to be somehow recouped.

A similar call has been made in England after it emerged that Sir Fred Goodwin was leaving the RBS with a pension of £693,000 a year. Harriet Harman MP, potential successor to Gordon Brown, jumped on the band-wagon. She advocated what could only be described as the ‘Fred Goodwin Pension Reclamation Bill’ to expropriate the severance settlement that had already been agreed and signed off on by her Ministerial colleague, Paul Myners. In effect, Minister Harman was calling for retrospective legislation, which would requisition already agreed and paid payments to certain bankers.

The British Government clearly forgot the power under existing legislation for the company to recover pension benefits. Under Section 5 of the UK Pensions Act 1995, if someone is found guilty of fraud or gross negligence in their management of a company, then the company may go to court to disentitle the guilty party from a company pension. This provision strikes a balance in that it allows for judicial determination of the matter in the aftermath of a successful fraud action. Due process is guaranteed and mob sentiment is tempered, concepts Harriet Harman wasn’t interested in exploring since the “court of public opinion would not accept Sir Fred’s payout”.

“The rule of law is never more severely tested than when it is cited in defence of an unpopular individual”

In the absence of similar Irish provisions, retrospective legislation, which would remove pension benefits, without recourse to court, from people who have already received such benefits would be a significant and worrying development. Retrospective legislation of this kind is incompatible with the rule of law in a modern western democracy.

“The rule of law is never more severely tested than when it is cited in defence of an unpopular individual”

Indeed, pandering to populist sentiment in the creation of such far-reaching legislation would evoke memories of totalitarianism when benefits (in the form of property rights) were removed by retrospective legislation from certain other groups in society such as Jews in Nazi Germany or Muslims in the Balkans.

The issue with rights is that they apply to all while the problem with extreme legislation is that, once enacted, it can encroach on the freedoms of all. Should every worker in a State company (as many banks now are) who is accused by the media of wrongdoing be deprived of previously agreed pension rights without recourse to the courts?

To those who answer that question in the affirmative, there is a country that takes money, land and property from wealthy “undeserving” members of society. There is a country that always panders to the whim of popular opinion on the streets, where the Government declares that it acts in the interests of the common man and where wealth is distributed at the behest of the State. That country is Robert Mugabe’s Zimbabwe, the example of which, it is forcefully submitted, should not be followed in this jurisdiction.

On a pragmatic basis, it should be noted that sometimes large severance payments are paid so as to avoid the possibility of a costly unfair dismissals action. Equally bonuses are sometimes necessary, despite Government bailouts, to retain top employees with the specialised knowledge crucial to dispose of complex securities that ended up dragging the company to the brink of collapse last year.

Nevertheless, mob rule and consequent summary justice for scapegoats will not bring an end to our economic woes nor lessen the anger felt on the streets at the loss of jobs. Importantly, justice depends on defending the rule of law and the rule of law is never more severely tested than when it is cited in defence of an unpopular individual.

By all means, the authorities should engage in investigations pursuant to existing criminal and company law procedures in order to establish the veracity of allegations of fraud, deception and criminal conspiracy.

However, it is a step too far to undo politically inconvenient pension rights, already agreed between Government and former top executives, by way of punitive retrospective legislation.

While the bonuses recently paid to various bankers may seem unpalatable, the subversion of the rule of law itself would be catastrophic for all. It is for that reason that AIG employees will not be directly legally required to return their bonuses.

At the time of going to print, the US House of Representatives has come up with the innovative solution of placing a 90 per cent tax on bonuses paid to employees with incomes of over $250,000 in companies that received over $5 billion in taxpayer aid. While this is cleverly within the law, it is not strictly ethical. The tax is highly punitive and still has the effect of removing the benefits of contracts that were validly entered into. Congress may have placated the mob but it is not the most honourable of victories. It can only be hoped that the whole sorry episode has taught society some lessons.