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Should a Leader be Put on Trial for Bad Decisions?

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Two trials that connect small states to different dimensions of financial mismanagement have grabbed my attention in the last few weeks.

The first -- the trial of Geir Haarde -- the former Prime Minister of Iceland -- focuses attention on who or what is culpable for a financial crisis. Charged with negligence, Haarde is the first leader to be put on trial for the handling (or mis-handling) of the economy up to and during the meltdown of October 2008. Indeed, the trial is fascinating because it is not about what Haarde did in terms of personal corruption but about what he didn't do with respect to management at the apex of power. That is to say, Haarde is charged with being negligent because he did not ensure that proper safeguards were in place in particular over the collapse of the three major banks in Iceland.

As anybody who has read Michael Lewis' Boomerang can attest, it is easy to kick Haarde when he is down. Unlike most of the other players in the Icelandic saga, Haarde had some economic training. Nonetheless he comes across as being completely out of his depth leading a country positioned at the top of the UN's Human Development Index into near collapse in terms of not only a banking system but its currency, debt-to-GDP ratio, housing market, and unemployment rate.

Yet is it possible in the aftermath of such a systemic crisis for one person -- even if he was the leader of the government party at the time, to be targeted in this singular fashion? Was there not collective blame both within the government and through a wider circle including regulators and the corporate sector?

This image is accentuated by the strong personal links between Haarde (who was finance minister from 1998 to 2005 before becoming PM from 2006 to early 2009), David Oddsson, the head of Iceland's central bank from 2005 to 2009 (who himself was a long-serving PM from 1991 to 2004) and the so-called "Viking Raiders," who as owners of the three major banks loaded up with debt to purchase a wide number of domestic and overseas acquisitions.

The singling out of Haarde is made more problematic due to the inconsistency of this move with the April 2010 findings of the official inquiry into the failure of Iceland's banking system. This "truth commission" (in itself an interesting departure from the usual focus of such bodies on human rights), although targeting Haarde for criticism, found massive fault as well with the ex-finance minister, the former banking minister, and many others. The report also points out in stark terms the deficiencies of the ownership and management of the three banks: "The [inquiry] is of the opinion that the owners of all three big banks had an abnormally easy access to loans in these banks...the largest exposures of Glitnir, Kaupthing Bank, and Landsbanki were the banks' principal owners. This raises questions as to whether the lending is done at arm's length."

At odds with the old adage, the buck (or kroner!) does not stop at the top of the government structure. In a system full of what in the earlier Asian crisis was termed "crony capitalism," the problem was not just errors of omission but commission.

The second episode -- the trial and conviction of (Sir) Allen Stanford in a Houston court -- is commonly seen exclusively in terms of an elaborate $7 billion Ponzi scheme out of the Stanford International Bank -- along the lines of the Madoff case. However, from a world of global governance perspective, the interest of this case is the ability of such a figure as Stanford to influence (if not completely capture) a small state -- Antigua.

One of the many criminal charges against Stanford was that he bribed the main Antiguan bank regulator, the CEO of Antigua's Financial Services Regulatory Commission. Still, the scope of Stanford's influence went much beyond that one activity. Stanford was even mentioned in the 2004 Antiguan budget, in terms of an explicit pact between the Antigua and Stanford for funding of a hospital, a national library, and education complexes. A paid advertisement in Fortune magazine -- also in 2004 -- stated that: "Stanford International Bank Ltd. Is a prime example of Antigua's 21st Century business focus, with assets totaling more than $2,5 billion, and a growth rate that has averaged more than 30 percent a year."

Taking risks is an option -- even a necessity -- for small states. If signaling creativity and adaptive resilience, though, such unorthodox behaviour faces severe consequences when ethical and certainly legal lines are crossed. In these instances figuring out who or what is to blame is as blurred and controversial as the culpable practices in themselves.

(This article first appeared in Andrew Cooper's CIGI Blog Worlds of Global Governance.)