doi:10.1093/bjc/azp038

BRIT. J. CRIMINOL. (2009) 49, 439–450
Advance Access publication 30 May 2009

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE
LICENSING
John Braithwaite*
The most general lesson of the crime prevention literature is taken to be that repeat victimization and
repeat offending are concentrated in time and space; early intervention to prevent wider inﬂammation
of such hot spots is more effective than reactive general deterrence (as in economic models of crime).
That prescription is applied to how the 2008 ﬁnancial crisis might have been prevented and how
the crimes of Enron and Arthur Andersen might have been tackled to ameliorate the 2001 crisis.
Negative licensing based on walking the beat and kicking the tyres at ﬁnancial hot spots, with
reduced reliance on economic models of risk, is one remedy advocated. Then, the threat of negative
licensing might be used to motivate restorative justice that transforms the ethical culture, particularly
the bonus culture, of banks.
Keywords: global ﬁnancial crisis, regulation, ﬁnancial crime, restorative justice
What Works?
Here is one crude way of summarizing the ‘What Works?’ literature in criminology (e.g.
Sherman et al. 1997). Strengthening the criminal law—expanding its scope, increasing
police powers, easing burdens of proof, raising penalties—is rarely counted among the
most effective interventions in reducing crime. Yet, when it comes to a ﬁnancial crisis,
criminologists join the assumption that strengthening regulation, conceived in the
expanded-criminal-law-powers paradigm, is the priority. Better laws on hedge funds and
derivatives are needed. Yet, believing they will ﬁx the problem and prevent future
disasters is like arguing that tighter regulation of gas chambers would have ﬁxed the
Third Reich.
The intuitions of Main Street are right that the masters of the universe on Wall Street
who caused this crisis should not be left in charge. Yet, more than a new oligarchy is
required; institutional transformation of ﬁnance capitalism is needed. That can only be
accomplished with a dose of socialism until we institutionalize architecture of a
reinvigorated ﬁnancial capitalism that manages risks instead of gaming them. Crisis will
become more endemic if we allow bankers to pass the parcel or plead ‘we are too big to
fail’ when the music stops with them holding bad assets.1 A ﬁnancial architecture that is
more risk managing rather than risk shifting is not impossibly hard to build. Most of
Asia’s banks, most of the banks in Australia and in Canada have it now. America’s banks
used to have it. It’s the politics that is hard. The Obama Administration must topple the

*Regulatory Institutions Network, College of Asia and the Paciﬁc, Australian National University, Canberra, ACT 0200, Australia;
John.Braithwaite@anu.edu.au
1
In July 2007, the then chief executive of Citigroup, Charles ‘Chuck’ Prince, said ‘When the music stops, in terms of liquidity,
things will be complicated. But as long as the music is playing, you’ve got to get up and dance’ (O’Brien 2009: 10).

439
© The Author 2009. Published by Oxford University Press on behalf of the Centre for Crime and Justice Studies (ISTD).
All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

BRAITHWAITE

old oligarchy, some of whom it embraced within its ranks, and rebuild the institutions
of Wall Street as risk managing and not just risk shifting institutions.
Reinvented privatised banks are then needed because a new socialist oligarchy is one
of the few things that could be worse than the current Wall Street oligarchy. The most
important element of a new regulatory architecture is not the regulation of the ﬁnancial
products that brought on the crisis. Risk shifting capitalists will hire ﬁnancial engineers
to build new risk shifting products (not conceived of in the new laws) that game their
way to the next boom. The most crucial need is enforcement that removes irresponsible
risk shifters as soon as hot spots of failure to manage risk appear. That requires more
regulatory bureaucrats kicking the tyres of ﬁnancial institutions. Second, it requires
negative licensing laws that institutionalize the clean-out of risk shifting oligarchs.
President Obama needs to do that as an act of political ﬁat right now in the banks he is
bailing out. Third, I argue for restorative justice conferences in ﬁnancial institutions
that the new cadre of regulatory bureaucrats implement as soon as they detect failures
to manage risk. This is ﬂeshed out by ﬁrst considering the fundamentals of what does
work in crime control and why negative licensing and restorative justice are responsive
to those insights.
Target Hot Spots
What are the kinds of things that do deliver in the ‘What Works’ literature? They include
identifying hot spots, high-risk spaces, times and groups of people, and targeting smartly
attuned preventive and rehabilitative measures at the hot spots (Sherman 1995).
Targeting improved detection at hot spots helps when that leads to evidence-based
interventions; we know from the perceptual deterrence literature (e.g. Paternoster and
Iovanni 1986) that improved detection makes more difference than the increased
punishment that might or might not be delivered by stronger laws. Further, we know
that the best predictor of who will be a victim of burglary is living in a dwelling that has
been burgled in the past year (Pease 1998). We know that young men who are released
from prison have a remarkably high probability of going back to prison.
So, it might be wise to apply these fairly banal general lessons from criminology to
how to prevent the next global ﬁnancial crisis. We would look to early prevention by
ﬁnding the banks in the world system that had the highest density of bad loans. That was
easy to do, as housing loan defaults were being counted for years before this crisis. In
2007 and 2008, those banks would not have been located in the half of the world that is
Asia. Improved national and international oversight after the 1997 Asian economic
crisis actually left those banks more conservative, prudent and accountable than they
had been before 1997. The dominos of the Indonesian ﬁnancial system that fell in 1997,
for example, have stood strong in 2008 and 2009. Nor did China and India have major
toxic asset problems. The world has a global economic crisis—but only a regional, North
Atlantic banking regulation crisis. It is concentrated in the same ﬁnancial hot spots
where a cognate regulatory problem is concentrated, the corporate tax shelter problem.
Empirically, the world’s two biggest tax havens are both islands—Manhattan and Britain
(Braithwaite 2005). New York and London created capitalism’s badlands by promoting
the idea that risks were things smart people shifted rather than controlled and accepted
responsibility for. The risk shifting society spread across hinterlands of these two hot
spots.
440

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE LICENSING

Had we tackled early prevention from 2004 at the banks in the world system that
showed early warnings of abnormal loan defaults, most of those hot spots would have
been banks in the United States. We do not have an evidence base for what would have
been the most effective way to do preventive, rehabilitative and deterrent work at those
hot spots. To get to that point, more evidence-based criminologists must work on these
problems. They are currently solved by economists on the basis of economic theory and
lawyers who have a hammer (reform the law) and see a lot of nails. These perspectives
are important, but not as important as reform of regulatory enforcement.
Just two ideas are considered here—negative licensing and restorative justice.
Restorative justice has an evidence base to support its effectiveness more broadly
(Braithwaite 2002; Latimer et al. 2001; Bonta et al. 2006; Sherman and Strang 2007);
negative licensing does not have any systematic evidence to support it, though there are
many case studies of its successful application (e.g. Braithwaite et al. 2007).
Bottom-Up and Top-Down Negative Licensing of Executives
The global recession started at a micro level. Mrs Smith and Mr Jones were given bigger
loans for bigger homes than they could afford. Often, there was fraud; US banks
encouraged them to inﬂate their income, for example. The bank blames Mrs Smith for
its predatory lending. Banks believed ﬁnancial engineering would shift the risks to
others. Mrs Smith’s default risk was bundled with thousands of other loans. Then, that
bundle of loans was divided into securities for sale. The bank shifted the risk to other
banks that bought shares of the loans. They did so because ratings agencies got rich
from the lure (Shover and Hochstetler 2006) of fees that gave them incentives to certify
the securitized risks AAA.
Everyone in the system believed they were using clever ﬁnancial engineering to shift
and spread their risks. With no one owning and confronting the risk of bad loans, bad
loans in the system grew to the point at which a crisis was waiting to happen with any
shock to market conﬁdence. The primary purpose of derivatives in contemporary
capitalism is to allow ﬁnancial institutions to get around regulatory responsibilities
(Partnoy 2003; Braithwaite 2008: Chapter 2). While law reform is needed there, so is a
reconﬁgured enforcement assault on the culture of risk shifting.
If we write a home loan to Mrs Smith, we have a responsibility to ensure it is a loan she
can afford when times get tough. That is a banker’s responsibility to Mrs Smith and to
the solvency of our society. We can remedy insolvency with regulatory institutions that
require those who sign unconscionable contracts to be ethically responsible for them.
Aggressive enforcement of negative licensing laws that exist in Australia and New
Zealand for regulating ﬁnance brokers and insolvency practitioners is one remedy. The
idea is not to require a bank ofﬁcer to have a licence before they can issue a loan or
manage a bank. That’s a positive licence. A negative licence means the regulator can
issue an order that the individual banker be banned from working in the ﬁnance
industry.
Countless thousands have lost their jobs in US banks. It would have been more just if
a few thousand of these innocent employees were able to take the jobs of morally
culpable bank executives who were negatively licensed out of the sector. Then, future
use of negative licensing would be a credible threat to get bankers to take notice of their
responsibilities. The way this strategy could have targeted early prevention at the ﬁrst
441

BRAITHWAITE

hot spots to appear might have been as follows. US prudential regulators would have
been regularly monitoring bank branches that reported actuarially high default rates.
Years ago, they would have arrived at those branches to kick the tyres. They would have
found false representations of the incomes of borrowers on loan documents and other
clear evidence of predatory lending. Bank managers with their signatures on those loan
documents would then have been negatively licensed out of the ﬁnance industry from
2004. The idea is this would have nipped in the bud the contagion of risk shifting that
spread across the world from what was initially a tractable set of hot spots in the United
States. Hot spots only spread to become systemic risks if there is a failure to deploy
simple regulatory technologies when they ﬁrst appear.
A limitation of this strategy is that it can target fungible middle managers, while the
masterminds of risk shifting capitalism march on. The kind of restorative justice
advocated in the next section is one response to this designed to transform institutions.
A second is that once bottom-up negative licensing has failed, the crisis that follows
creates an opportunity for top-down negative licensing of ﬁnancial oligarchs and whole
banks. When oligarchies bankrupt lesser societies than the United States, as they
regularly do, the IMF marches in and gives the leadership no choice but to cut off the
ﬂow of blood to some of the bigger bloodsuckers. In many cases, the old political
leadership cannot survive this. Indonesia was an example when President Suharto fell
in 1998 after being forced by the IMF to end the haemorrhaging to his oligarchs, who
then abandoned him and caused his fall. The IMF does not march into Washington
because the IMF is Washington. In recent history, the IMF has touted the Washington
Consensus, a set of rules that suited the masters of the universe when those in servitude
abided by them. But the Washington Consensus was also about the fact that the masters
of the universe were themselves above those rules. It was a system of hegemonic ‘do as
we say, not as we do’. Few societies have been less compliant with the Washington
Consensus than the United States.
What was right about the Washington Consensus was that ﬁscal and monetary
disciplines are good things. It is unwise and unsustainable for individuals, for banks and
for nations to live (persistently) beyond their means. America’s tragedy is that, for a
long time, it has needed some of the discipline that the IMF inﬂicted on others.
Discipline is not in the interests of those atop a gravy train; they want those bonuses to
keep coming in until they make it to retirement, leaving clean-up to the next generation
of bankers. Former IMF chief economist, Simon Johnson (2009), argues that a recurrent
feature of bankrupt nations is that, during booms, as bigger risks pay off, business elites
close to the regime take ever wilder risks, conﬁdent that the political elite they prop up
will bail them out if they falter. The challenge for leaders of bankrupt states is to ﬁnd the
courage to cut off support to the ﬁnancial oligarchs and the organizations they have
created. This is about stopping the national haemorrhaging from them. And it is about
creating a space for new prudent banks that will inspire trust.
Because the IMF is institutionally incapable of saving America, it can only be saved by
a leader brave enough to take on the oligarchs. They do not come along often. Hopefully,
President Obama may be such a leader. Part of the legacy of one leader with that kind
of greatness, Franklin D. Roosevelt, was the IMF. Theoretically, the IMF was supposed to
enforce ﬁscal and monetary discipline upon all nations, including the United States.
But, with the United States pulling the strings at the IMF, that proved a dream. America’s
paradox now is that it will do best by its people to empower China and other more
442

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE LICENSING

solvent nations to discipline America’s masters of the universe. China and the rest of the
G-20 must learn the lesson that they failed their people by not demanding action at US
hot spots. It was a failure of their ﬁnancial intelligence not to recognize the global risk
of the increased delinquency rates on US residential mortgage loans that began in
September 2006, accelerated sharply from mid-2007 (IMF 2009: 23) and was preceded
by public FBI warnings of an epidemic of mortgage fraud in 2004 (Black 2009). Bad
medicine for the masters of America is not bad for the people of America, even if it
tastes unpleasant when prescribed by China.
President Obama needs to be a strong enough leader to support a new national and
international ﬁnancial architecture that will institutionalize distrust in Wall Street’s
oligarchs. Johnson (2009) argues that Democrats and Republicans blame different
drivers of the crisis. Democrats blame regulators asleep at the wheel; Republicans blame
the ﬂow of savings out of China, the unwritten Chinese–American economic alliance and
excessive promotion of homeownership for the poor. Johnson argues the failings
attributed by each side of politics to the other share in common being policies that
pleased the investment banking elite. New York and London have the most sophisticated
business oligarchy in the world. It does not rule mainly by stufﬁng dollars into the pockets
of politicians, though it does do that. It rules mainly by bluff and hegemony, by persuading
political elites that it knows what it is doing. Politicians did not understand the bankers’
risk management models, but they believed their incredible sophistication was helping
to extend the boom and cushion the busts of previous business cycles. The ﬁnancial
oligarchs did not understand them either; the models were just a good story that they
bought from economists who were happy to be well rewarded for not talking too loudly
about their shaky assumptions and the gaps in what they were able to quantify.
These oligarchs do need to be incapacitated because they are still doing damage, still
paying themselves obscenely to do it, still paying modellers to con us into believing that
they are coming up with the answers, when the answers of interest to them are not ones
that will best heal the world economy. Their answers are crafted to save themselves.
Some of the American oligarchs are still behaving like addicted gamblers—afraid to
expose or face the truth that they are insolvent, demanding taxpayers’ money to place
new bets that could pay big winnings, but are more likely to lose. Putting them in jail to
incapacitate them is not important; putting them out of their ofﬁces, quickly, is
fundamentally important. This has not happened on the scale or with the speed needed.
That is standard in a crisis induced by ﬁnancial oligarchs; the politics of incapacitation
and cutting the losses is always painful and therefore always insufﬁciently ruthless with
con-artists whom the politicians would still love to believe.
Wise ﬁnancial crisis management in the ﬁrst instance shuts down the oligarchs who
caused the crisis and stops their ﬁnancial rot. It nationalizes their banks and breaks
them up. Or they can be re-privatized whole, but on condition of selling off large chunks
of themselves within contracted periods. It is about building new institutions of capitalism
in which trust can be renewed. New ethical banks that are not too big to fail are a better
idea than propping up institutions that were the architects of the looting. As Johnson
(2009) puts it, ‘Anything that is too big to fail is too big to exist’. More moderately,
prudent polities minimize their hostage to the fortunes of organizations that are too big
to fail. They accomplish that by rigorous antitrust enforcement.
Then, the ratings agencies must either transform themselves or suffer corporate
capital punishment. The world cannot afford a Standard & Poors with an executive who
443

BRAITHWAITE

could say ‘let’s hope we are all wealthy and retired by the time this house of cards
falters’, or another who said ‘We rate every deal. It could be structured by cows and we
would rate it’, and another ‘Proﬁts were running the show’ (O’Brien 2009: 75). The
ratings agencies made AAA gold out of defaulting loan dross. Because the ratings
agencies will probably be incapable of ethical transformation, it will likely be best to kill
them off. If Obama is not the sheriff who can clean up his badlands, then the European
Union might do well to create a non-proﬁt ratings agency that does shoe leather due
diligence at hot spots instead of shonky modelling. It would compete with Standards &
Poors and Moody’s for international business with the pitch that its ratings are more
trustworthy. The United States, in turn, needs legislative authority to negatively licence
its ratings agencies. By threatening to march in, throw out the management, and run
them as government ratings agencies if they allow a crisis of poor ratings integrity
anything like that of the feckless ﬁnancial establishment of 2008, the Obama
administration might just be able to induce the ethical transformation needed in the
ratings business. In the current crisis, the systemic risk of conﬂict of interest in the
ratings agencies proved so profound that an enforcement pyramid (Braithwaite 2008)
with anything less than corporate capital punishment at its peak would seem reckless.
The next institutional transformation needed is of the bonus culture of ‘heads we
win, tails shareholders lose’. Capitalism worked better when investment banks like
Salomon Brothers, Morgan Stanley and Goldman Sachs had partners who would lose
everything if the partnership failed (Bhidé 2009). The rules of the bailout machine can
be changed to mimic this past virtue. When small businesses start sinking, lenders seek
to repair them at sea by making owners sign personal guarantees that their last cent will
go into ﬁlling the hole. Bailouts would not be as big a moral hazard if the captains of
Wall Street’s ships were actually bailing as their ships took water. But, when captains
instead are allowed to load themselves up with gold and head for a life raft, it smells of
cronyism. Preventively, Prime Minister Rudd of Australia has headed in the right
direction by instructing the Australian Prudential Regulation Authority to propose a
mechanism to require banks to keep more capital in reserve if they pay bonuses that, in
the judgment of the Authority, rewards risky short-termism in investment (Franklin
2009). This is a good example of how prudential regulation must shed the malaise of
the more measurable driving out the more important. Quantitative models are useful
for guiding reserve requirements, but must be supplemented by qualitative diagnoses of
wise heads thinking about what is making hot spots hot.
Finally, the IMF must be radically reformed so that it can discipline even Wall Street
in the interests of the people of America. Yes, then, ﬁnally, some new regulations are
needed to cover the existing gaps in the regulatory coverage of derivatives and hedge
funds. That is important, but it must be viewed within a perspective of assurance that a
new generation of masters of the universe will struggle for power through a new era of
ﬁnancial engineering to game the new rules. Much more important is a new modality of
regulatory enforcement that is deliberative, restorative, responsive, but also potentially
incapacitative through negative licensing. US Treasury Secretary Geitner’s plan is to
require hedge funds to register with the Securities and Exchange Commission and
disclose certain ﬁnancial information (Clark 2009) (limited positive licensing that the
London G-20 also agreed for both hedge funds and credit ratings agencies (G-20 2009)).
This is no substitute for the power to negatively licence hedge funds, like credit ratings
ﬁrms, and the individuals who control them, so the state can take them over and put
444

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE LICENSING

ethical managers in charge. If we can threaten that power to potent effect (while rarely
having to use it) with pygmies of capitalism like callous nursing home proprietors
(Braithwaite et al. 2007), we should be able to do it with the giants of Wall Street.
Restorative Justice
This section of the paper takes us back to the last ﬁnancial crisis (of 2001) to argue that
restorative justice could have prevented the collapse of Enron! After 2000, when Enron
and Worldcom collapsed in the United States, and this, in turn, led to the collapse of
their auditor, Arthur Andersen, there were bankruptcies of some major Andersenaudited ﬁrms in Australia, the most important of which was our insurance giant, HIH.
What could regulatory agencies have done to prevent the misconduct that led to the
collapse of Enron, Worldcom and HIH? I made one suggestion at a meeting of the
Australian Tax Ofﬁce Aggressive Tax Planning Committee. I pointed out that two
members of the Committee had separately said during my interviews that they had the
following experience in the late 1990s. A Big Five partner got one of their wealthy clients
into deep trouble for tax cheating. A more senior partner then visited the tax ofﬁcer
and said ‘This is a rogue partner and we are going to get rid of him. We would hate you
in the Tax Ofﬁce to think that other partners condone what he did’. My suggestion was
that such an encounter creates a golden opportunity for the regulator to tackle the
ethical climate in the major accounting ﬁrms and investment banks. So, I argued that
the senior tax ofﬁcer should reply:
That’s good that your other partners do not condone this and I’m pleased to hear it because we at the
Tax Ofﬁce were disturbed by the non-compliance that occurred here and are always concerned with
something of this gravity that it might reﬂect a culture of non-compliance in your ﬁrm. Could we have
a meeting to discuss this with all your partners?

When they agree to this, and regulatory experience with restorative justice elsewhere
suggests that they would (Parker 2004), it would be requested that the meeting be
facilitated by a restorative justice practitioner. This facilitator would insist that the
‘rogue’ partner who was about to be scape-goated also attend. She would be the ﬁrst
person asked to speak by the facilitator. She would tell, in her own words, how the
incident that got her into hot water had occurred. It might turn out, if this were
Arthur Andersen, that the ‘rogue’ partner was not a rogue partner at all, but a fall-guy,
who was actually following the culture of the ﬁrm. Then, in the conclusion to the
conversation about the harm that has been done, when everyone in the restorative
justice circle is asked what they think should be done to ensure nothing like this
happens again, if someone else has not already suggested it, the regulator could
request an audit of the ﬁrm’s systems for compliance with ethical standards. That
independent evaluation of compliance systems would be conducted by a consultant
whose independence enjoyed the conﬁdence of both the ﬁrm and the Tax Ofﬁce. Its
recommendations would be reported back to a reconvened meeting of the restorative
justice circle, which would discuss whether they went far enough. It would normally
be made public for the purpose of catalysing wider crime prevention. A year later, the
circle might be convened again to receive a report from the accounting ﬁrm and the
consultant on how thoroughly the reforms to the compliance culture had been
implemented. Active engagement of an errant Arthur Andersen with such a restorative
445

BRAITHWAITE

justice process is enabled by the Tax Ofﬁce being able to threaten the licence of an
Arthur Andersen to offer tax advice. Without the power to escalate to corporate capital
punishment by negative licensing, ﬁrms might not cooperate with restorative justice.
The Tax Ofﬁce was one of a number of Australian regulatory agencies receiving
reports of dubious ethics by Arthur Andersen in the late 1990s. So, there were multiple
agencies on multiple issues with an opportunity to catalyse a major ethics self-examination
of Arthur Andersen before their conduct brought down companies like HIH, Enron
and itself. It would be surprising if that were not also the case with US regulators. The
beautiful thing about this regulatory strategy with global ﬁrms is that, even if it has no
appeal to US regulators, there is a possibility that its application by the Australian Tax
Ofﬁce to Arthur Andersen’s ethically questionable proﬁt shifting into tax havens on
behalf of Australian ﬁrms might have lifted the lid on similar work it was doing for ﬁrms
like Enron in the United States. The more regulatory agencies around the world that
were using restorative justice in this fashion on the Arthur Andersens and Enrons, the
more unethical ﬁrms like these would have their ethics globally exposed. The ethical
exposure of Enron in turn might have exposed other masters of the universe. As the
Regents of the University of California alleged in their civil complaint against major
investment banks, ‘This fraudulent scheme could not have been and was not perpetrated
only by Enron and its insiders. It was designed and/or perpetrated only via the active
and knowing involvement of Enron’s banks, including JP Morgan, Citigroup, Credit
Suisse First Boston, Merrill Lynch, Deutsche Bank, Barclays, Lehman Brothers and Bank
of America’ (O’Brien 2009: 44).
A relevant strength of this restorative justice strategy is that it can move regulators in
on hot spots long before they light conﬂagrations like the string of 2001 collapses. The
philosophy is that it is a mistake to wait until there is enough evidence to launch a
prosecution. This was a not dissimilar regulatory failure to the FBI doing nothing about
persons of concern learning how to ﬂy aircraft (without showing interest in how to land
them) because they could not see a collar. In the case of the predatory lending problem
that ﬁrst became evident to the FBI in 2004 (Black 2009), restorative justice conferences
in some banks whose managers were being investigated with a view to negatively
licensing them out of the ﬁnance sector in 2004 might have revealed that the pattern
of predatory lending was not yet very serious. The restorative justice conference at the
bank might not have sanctioned anyone, but might have served as a warning shot that
prevented the problem deepening at that bank. This is an application of what I take to
be the fundamental lesson from the ‘What Works?’ literature that we make the biggest
impact on crime by proactive crime prevention at hot spots, not by general deterrence
after the damage is done.
Movement back from risk shifting to risk management will prove in the long-term
interests of banks. Wise old bankers knew that all along. That is why we can ﬁnd so many
quotes from them about their past fears about the ‘house of cards’ collapsing. These
wise heads within Wall Street might have jumped at the opportunity to save their bank
through a restorative justice confrontation about the need to abandon the philosophy
that they could keep shifting risks rather than managing them. Structurally, the risk
shifting society is untenable in the long run, as well as unethical. This is why its abuses
could have been prevented by the organizational ethical deliberation that is such a
strength of restorative justice (Braithwaite 2002). If the problem that was driving
predatory lending in a particular bank was a bonus culture based quantitatively on
446

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE LICENSING

short-term proﬁts from trades or loans sold (without regard to loans defaulted), then
what might be called for in the restorative justice circle might be old-fashioned bonuses
based on contributions to the long-run proﬁtability of the ﬁrm.
Homeowners in the United States suffered about seven times the losses of banks as a
result of this crisis (Krugman 2008: 169). The rational way to minimize the losses that
both homeowners and banks are suffering as a result of foreclosure is to cut a deal with
the homeowner to reduce payments. Paul Krugman (2008: 167) argues that this did not
happen precisely because the mortgages had been sliced and diced into collateralized
debt obligations. Whoever the loan originators were, restorative justice conferences
were needed to require them under threat of wider negative licensing of the institution
to repair the harm by covering the loss from reduced repayment schedules that kept
people in their homes. Then, law reform is needed to help those banks recover some of
that loss from the other banks that had purchased a small slice of the mortgage. But, the
ideal would be that these part-owners of the mortgages would voluntarily agree to this as
part of restorative justice agreements because they would be the ultimate beneﬁciaries
of reducing the losses associated with foreclosure. Leaving ﬁne homes empty or bulldozed
while homelessness spreads is the economically wasteful and immoral outcome that can
be averted by reaching a conversational solution to this regulatory tangle.
Structural Explanation of Ethics and Structural Transformation of Ethics
We can see that better laws are only a part of the solution by imagining a world in which
ﬁnancial regulation was so total and perfect that it was impossible for a banker to behave
unethically. The problem in such a world is that it would also be impossible to behave
ethically. And ethical judgment is something that withers when it is not matured through
use. That is part of the case for responsive regulatory pyramids that enculturate trust,
while they institutionalize distrust (Braithwaite 1998). At the bottom of the pyramid, the
norm is one of trusting managers to hone their ethics through use, and through ethical
deliberation with peers. But criminal exploitation of trust triggers inexorable escalation
up a pyramid of checks and balances. Responsive regulation of abuse of trust is not
enough, however, because ethical behaviour is also shaped by structures of inequality.
The ethical society must be economically just, or at least must constantly struggle against
extremes of injustice, as well as being responsive.
Like many criminologists, I have long argued that the evidence supports the contention
that societies with both great extremes of poverty and great extremes of wealth have the
deepest crime problems (e.g. Braithwaite 1991). They experience crime in the streets
because the poor are exploited and crime in the suites because elites exploit. Both the
very poor and very rich experience anomie as normlessness of different kinds. The poor
experience anomie (Durkheim 1897) as disengagement from the normative order;
oligarchs enjoy the anomie of being above the rules (rules they believe should apply to
others). Oligarchs game the normative order rather than disengage from it (Braithwaite
2009); they beneﬁt from the respect others show to their property rights, feigning
support for property rights that they corrode in their own business practice. Their crime
is about Lord Acton’s dictum that ‘power corrupts, absolute power corrupts absolutely’.
America’s badlands (far from all of America) have both extremes and, as a result, have
abundant crimes of poverty (in the South Bronx) and crimes of oligarchy (on Wall
Street). Other societies have only one side of this problem in large measure. President
447

BRAITHWAITE

Suharto’s crony capitalism between 1966 and 1998, for example, was a world of
extraordinary wealth for a small oligarchy, but was one of the top ten nations in the
world in the share of national income that went to the poorest 10 per cent. It was,
according to Transparency International, the most corrupt nation on Earth, but had
quite a low homicide rate and safe streets.2
Both the gaming of the rich and the disengagement of the poor from the normative
order create mutually reinforcing crises of ethics for a society. The normlessness of an
underclass is vindicated for them when the pillage of oligarchs becomes visible. Oligarchs
learn that they can pillage with impunity because they think political leaders cannot do
without their support. Political leaders worry deeply about masters of the universe shifting
their mastery behind the political machines of their opponents. This is what allows oligarchs
to game the rules with impunity. Experience teaches them that they can play ever more
economically and ethically risky games, safe in the assurance that the political leaders they
have kept in power will cover for them or bail them out, or both. The oligarchy’s bourgeoning
risk-taking drives ever larger returns that buy ever greater mastery of politics.
Ultimately, however, the West can now see what the East saw in 1997—that risk taking
can go so far as to cause collapse of a whole economy. That is what happened in 2008 in
the relationship between the Wall Street elite and their servants in Washington. It was
not greased by anything like the level of corruption of Suharto’s Indonesia that caused
its massive economic collapse of 1997. The Washington Consensus was much more
hegemonic (Gramsci 1971). Middle America was on side with the Washington Consensus,
as their share portfolios fattened on phony assets engineered by the ﬁnance oligarchs.
Even after Enron caused a collapse, middle America continued to vote for its clients in
the Bush administration, at least until the second, bigger collapse of 2008.
While the rich, the middle class and especially the homeless poor are all losers in the
2009 recession, a new progressive politics links the poor and the middle class, who both
resent oligarchs who play ‘Heads I win, tails you taxpayers, shareholders and homeowners
lose’. They don’t think that they should be the ones worrying about insolvency when those
who played that game scoot to early retirement, recovering their bonuses in a Carribean
tax haven. It is encouraging that the G-20 London summit of 2009 decided to go after tax
havens as part of its reform agenda. The United States can create a great pool of resources
to tackle poverty, pay for health care, by beginning to tax the very rich again (Braithwaite
2005). Transforming the bonus culture born on Wall Street through tools such as those
above can not only directly increase income equality, indirectly, it can build businesses
that create more jobs for the poor by replacing short-termism with long-termism.
It comes with the territory of pushing forward the frontiers of capitalism that America
has created capitalism’s badlands of normlessness. Other nations have been able to
create more civilized social democratic forms of capitalism, partly because they have
been able to sit back and learn from mistakes that America made on that frontier (with
this crisis, the frontier of ﬁnancial engineering). But the history of American capitalism
has followed its largest crises with periods of profound progressivism—the Progressive
Era at the start of the last century and the New Deal. This included the invention of
progressive forms of taxation and forms of regulation in the United States that made
these institutions more redistributive than their counterparts in Australia, for example
(Braithwaite 2005; 2008: Chapter 1). Obama’s time can be yet another era of
2

This is the subject of Chapter 1 of a new book on peace building in Indonesia by John Braithwaite, to be published in 2010.

448

RESTORATIVE JUSTICE FOR BANKS THROUGH NEGATIVE LICENSING

transformative American leadership for civilizing all the world’s capitalisms if he opts
for a politics of responsive incapacitation and restorative justice rather than a politics of
deterrence and retribution of the kind that Bush feigned after Enron.
A Tale of Two Mertons
Robert Merton (1949) laid the theoretical foundations for the thesis that inequality
worsens crimes of poverty motivated by need (for dignity, for goods for use) and crimes
of oligarchy motivated by greed (lured by goods for exchange) (Braithwaite 1991).
Crime in the suites is lured by great wealth and power; crime in the streets is born of its
absence. Many children in poor families commit crime because they are abused and
exploited; many rich adults commit crime because they exploit and imbue a culture of
exploitation. Structurally, less exploitative societies are likely to have less of both kinds
of crime. The bonus culture has already created a wave of crime in the suites; in future
decades, it may create a new wave of crime in the streets as children grow up in families
that experience long-term unemployment and homelessness.
Merton never won a Nobel Prize for the insights of ‘Social Theory and Social Structure’.
His son, also Robert Merton, did, for his intellectual paternity of the new ﬁnancial
engineering. The hedge fund the younger Merton inspired and steered as a board
member, Long Term Capital Management, made stupendous returns in the 1990s
partnering with Bear Sterns, Merrill Lynch and a Cayman Islands company, but then
collapsed in 1998. One Merton is part of the problem of contemporary capitalism; the
other is part of the solution.
Funding
John Braithwaite’s research is funded by an Australian Research Council Federation
Fellowship.
Acknowledgements
My thanks to Bronwyn McNaughton, Fiona Haines, Christine Parker and anonymous
referees for helpful comments.
References
Bhidé, A. (2009), ‘In Praise of More Primitive Finance: Economists’ Voice’available online
at www.bepress.com/ev (accessed 29 March 2009).
Black, W. K. (2009), ‘Interview for Bill Moyers Journal’, available online at www.pbs.org/
moyers/journal/04032009 (accessed 28 April 2009).
Bonta, J., Jesseman, R., Rugge, T. and Cormier, R. (2006), ‘Restorative Justice and
Recidivism: Promises Made, Promises Kept?’, in D. Sullivan and L. Tifft, eds, Handbook of
Restorative Justice: A Global Perspective. London: Routledge.
Braithwaite, J. (1991), ‘Poverty, Power, White-Collar Crime and the Paradoxes of
Criminological Theory’, Australian and New Zealand Journal of Criminology, 24: 40–58.
——(1998), ‘Institutionalizing Distrust, Enculturating Trust’, in V. Braithwaite and M. Levi,
eds, Trust and Democratic Governance. New York: Russel Sage.

449

BRAITHWAITE

——(2002), Restorative Justice and Responsive Regulation. New York: Oxford University Press.
——(2005), Markets in Vice, Markets in Virtue. New York and Sydney: Oxford and Federation
Press.
——(2008), Regulatory Capitalism: How It Works, Ideas for Making It Work Better. Cheltenham:
Edward Elgar.
Braithwaite, J., Makkai, T. and Braithwaite, V. (2007), Regulating Aged Care: Ritualism
and the New Pyramid. Cheltenham: Edward Elgar.
Braithwaite, V. (2009), Deﬁance in Taxation and Governance. Cheltenham: Edward Elgar.
Clark, A. (2009), ‘Geithner Announces New Rules of the Game for Wall Street’, The
Guardian, available online at www.guardian.co.uk (accessed 10 April 2009).
Durkheim, E. (1897), Suicide: A Study in Sociology. London: Routledge & Kegan, 1952.
Franklin, M. (2009), ‘Let Crippled Banks Fail: Kevin Rudd’, The Australian, 4 March.
G-20 (2009), ‘Restoring Lending: A Framework for Financial Repair and Recovery’
proceedings from the meeting of Finance Ministers and Central Bank Governors, United
Kingdom, 14 March 2009, available online at www.mfcr.cz/cps/rde/xbcr/mfcr/2009_
communique_annex_horsham_uk_20090314_pdf.pdf.
Gramsci, A. (1971), Selections from the Prison Notebooks. New York: Columbia University Press.
International Monetary Fund (IMF) (2009), Global Financial Stability Report: Responding to the
Financial Crisis and Measuring Systemic Risks. Washington DC: International Monetary Fund.
Johnson, S. (2009), ‘The Quiet Coup’, The Atlantic, May 2009, available online at www.
theatlantic.com/doc/200905/imf-advice (accessed 8 April 2009).
Krugman, P. (2008), The Return of Depression Economics and the Crisis of 2008. London: Penguin
Books.
Latimer, J., Dowden, C. and Muise, D. (2001), The Effectiveness of Restorative Justice Practices:
A Meta-Analysis. Ottawa: Department of Justice, Canada.
Merton, R. K. (1949), Social Theory and Social Structure. New York: Free Press.
O’Brien, J. (2009), Engineering a Financial Bloodbath. London: Imperial College Press.
Parker, C. (2004), ‘Restorative Justice in Business Regulation? The Australian Competition
and Consumer Commission’s Use of Enforceable Undertakings’, Modern Law Review, 67:
209–46.
Partnoy, F. (2003), Infectious Greed: How Deceit and Greed Corrupted the Financial Markets.
London: Proﬁle Books.
Paternoster, R. and Iovanni, L. (1986), ‘The Deterrent Threat of Perceived Severity: A
Reexamination’, Social Forces, 64: 751–77.
Pease, K. (1998), Repeat Victimisation: Taking Stock, Police Research Group Crime Detection and
Prevention Series Paper 90. London: Home Ofﬁce.
Sherman, L. and Strang, H. (2007), Restorative Justice: The Evidence. London: The Smith
Institute.
Sherman, L., Gottfredson, D., MacKenzie, D., Eck, J., Reuter, P. and Bushway, S. (1997),
Preventing Crime: What Works, What Doesn’t, What’s Promising: A Report to the United States
Congress. Washington, DC: National Institute of Justice.
Sherman, L. W. (1995), ‘Hot Spots of Crime and Criminal Careers of Place’, in J. E. Eck
and D. Weisburd, eds, Crime and Place: Crime Prevention Studies, Vol. 135–52. Monsey, NY:
Criminal Justice Press.
Shover, N. and Hochstetler, A. (2006), Choosing White-Collar Crime. New York: Cambridge
University Press.

450

