FP Explainer

Could U.S. Officials Be Charged for Causing the Financial Crisis?

No. It's not against the law for politicians to screw up.

TIM SLOAN/AFP/Getty Images
TIM SLOAN/AFP/Getty Images

Iceland’s parliament voted this week to refer former Prime Minister Geir Haarde to a special court where he may face charges of criminal negligence during the collapse of the country’s financial sector, which left taxpayers on the hook for billions of dollars in debt. According to a government investigation, Haarde’s administration missed a number of specific opportunities in 2008 to limit the damage of the impending banking meltdown to the greater Icelandic economy. If convicted, Haarde could potentially face up to two years in jail. Could U.S. officials ever face charges for the market crash and the ensuing recession?

No. Even if it could be proved that regulatory decisions or lax oversight in the run-up to the crash directly contributed to the chaos that followed, former President George W. Bush, former Federal Reserve Chairman Alan Greenspan, and other officials probably don’t have much to worry about. The century-old Icelandic law under which Haarde might be charged — which has never before been invoked — stipulates that ministers can be held responsible not just for actions that put the country in danger, but for not taking action to prevent that danger. There’s simply no equivalent crime in the United States — officials can’t be held legally responsible for simply doing a bad job.

They’re probably safe from civil lawsuits as well. Under U.S. law, government officials are granted immunity for actions conducted during the course of their duties, unless they knowingly violate "clearly established statutory or constitutional rights of which a reasonable person would have known." So unless U.S. regulators were purposely colluding with companies to defraud investors, they can’t be held responsible.

That might change, however. The doctrine of official immunity is being challenged by convicted terrorist Jose Padilla’s lawsuit against former Justice Department lawyer John Yoo. Padilla has accused Yoo of violating his constitutional rights by writing a memo when at the Office of Legal Counsel arguing that the U.S. citizen be classified as an enemy combatant and writing others arguing that these combatants could be subjected to "enhanced interrogation techniques." Over the Obama administration’s objections, a California judge denied Yoo’s request to have the suit thrown out on the basis of official immunity. The motion has been appealed, but in order for Padilla to receive damages, he will have to prove that not only did Yoo give  bad legal advice, but that he knowingly or incompetently overlooked constitutional rights that no one could possibly dispute — a tough standard to meet.

The private ratings agencies and investment banks involved in the subprime mortgage crisis don’t have quite the same legal protections as government officials and are fighting suits from state and federal regulators.

Iceland’s law is pretty unique, but countries under the Westminster system — those based on the British parliament — traditionally operate under a principle of "ministerial responsibility." This holds that ministers are responsible for the actions of the personnel in their ministry and are expected to resign in cases of gross incompetence or face charges for criminal actions, even if they weren’t directly involved in the deed. In practice, this is almost never enforced anymore.

So while Iceland may have started a trend as the first government to collapse because of the financial crisis, we probably won’t be seeing more heads of state following Haarde into the dock.    

Thanks to Peter Schuck, professor emeritus at Yale Law School, Zephyr Teachout, associate professor at the Fordham University School of Law, and Scott Nelson, attorney at Public Citizen. 

Iceland’s parliament voted this week to refer former Prime Minister Geir Haarde to a special court where he may face charges of criminal negligence during the collapse of the country’s financial sector, which left taxpayers on the hook for billions of dollars in debt. According to a government investigation, Haarde’s administration missed a number of specific opportunities in 2008 to limit the damage of the impending banking meltdown to the greater Icelandic economy. If convicted, Haarde could potentially face up to two years in jail. Could U.S. officials ever face charges for the market crash and the ensuing recession?

No. Even if it could be proved that regulatory decisions or lax oversight in the run-up to the crash directly contributed to the chaos that followed, former President George W. Bush, former Federal Reserve Chairman Alan Greenspan, and other officials probably don’t have much to worry about. The century-old Icelandic law under which Haarde might be charged — which has never before been invoked — stipulates that ministers can be held responsible not just for actions that put the country in danger, but for not taking action to prevent that danger. There’s simply no equivalent crime in the United States — officials can’t be held legally responsible for simply doing a bad job.

They’re probably safe from civil lawsuits as well. Under U.S. law, government officials are granted immunity for actions conducted during the course of their duties, unless they knowingly violate "clearly established statutory or constitutional rights of which a reasonable person would have known." So unless U.S. regulators were purposely colluding with companies to defraud investors, they can’t be held responsible.

That might change, however. The doctrine of official immunity is being challenged by convicted terrorist Jose Padilla’s lawsuit against former Justice Department lawyer John Yoo. Padilla has accused Yoo of violating his constitutional rights by writing a memo when at the Office of Legal Counsel arguing that the U.S. citizen be classified as an enemy combatant and writing others arguing that these combatants could be subjected to "enhanced interrogation techniques." Over the Obama administration’s objections, a California judge denied Yoo’s request to have the suit thrown out on the basis of official immunity. The motion has been appealed, but in order for Padilla to receive damages, he will have to prove that not only did Yoo give  bad legal advice, but that he knowingly or incompetently overlooked constitutional rights that no one could possibly dispute — a tough standard to meet.

The private ratings agencies and investment banks involved in the subprime mortgage crisis don’t have quite the same legal protections as government officials and are fighting suits from state and federal regulators.

Iceland’s law is pretty unique, but countries under the Westminster system — those based on the British parliament — traditionally operate under a principle of "ministerial responsibility." This holds that ministers are responsible for the actions of the personnel in their ministry and are expected to resign in cases of gross incompetence or face charges for criminal actions, even if they weren’t directly involved in the deed. In practice, this is almost never enforced anymore.

So while Iceland may have started a trend as the first government to collapse because of the financial crisis, we probably won’t be seeing more heads of state following Haarde into the dock.    

Thanks to Peter Schuck, professor emeritus at Yale Law School, Zephyr Teachout, associate professor at the Fordham University School of Law, and Scott Nelson, attorney at Public Citizen. 

Joshua E. Keating was an associate editor at Foreign Policy.

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