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Faux Outrage Over 'Too Big to Jail'

Attorney General Eric Holder's statement that some U.S. banks have grown so large that they cannot be prosecuted was apparently an exciting moment for proponents of breaking up the big banks. "Too big to jail!" has almost overnight become this group's battle cry. Unfortunately, like most of the chatter in this area, it is ill-informed and reeks of ideological motivations instead of common sense.

Corporations or banks do not violate the law. Their officers, employees—sometimes even their boards of directors—violate the law. This includes money laundering, fraud, theft and every other crime known to the justice system. That means the proper defendants when an institution of any kind has violated the law are those who conspired to direct it in that path, not the firm itself.

It was not long ago that the Justice Department, foolishly, indicted the auditing firm Arthur Andersen for its employees' behavior in the Enron matter. The result was the destruction of the firm's practice and a reduction in the number of global U.S. auditing firms from five to four, severely limiting competition where it was already weak.

After this happened, people in Washington looked at one another and asked why DOJ would do such a dumb thing. The people in Arthur Andersen who were responsible for the audit of Enron were known. They could have been indicted instead of the firm. There were thousands of Andersen employees and firm leaders who were entirely innocent of any wrongdoing in Enron; all of them lost their jobs.

Unfortunately, this was another example of Washington acting recklessly when it wanted to make a political point—in this case that the Justice Department was vigorous in prosecuting white collar wrongdoers as well as other kinds. This is mean and nasty behavior, unbecoming for any government, but especially so for a government of laws. Indicting the firm rather than those who engaged in the wrongful acts cost a lot of other Arthur Andersen employees their jobs. There was never a satisfactory answer for the Justice Department's behavior in the Andersen case.

Now Attorney General Holder is complaining that certain banks are just too large to prosecute for crimes. He is correct if the idea is to indict the bank. Something like that would probably destroy banks—of any size—which depend for their business on the confidence of their depositors and customers. But except in the most unusual circumstances, it is a mistake to indict a firm that is a going concern when the malefactors within the firm can be identified and prosecuted. Indeed, it is difficult to imagine a reason that an entire firm should be prosecuted unless it is a criminal enterprise, and despite the beating they have been taking in the media the banks have not reached this level of opprobrium.

One problem with indicting officers, rather than the institution, is that the DOJ is less likely to get a fat financial settlement. The indicted officers are more likely to be midlevel employees, who can't afford huge fines, rather than highly paid executives, whose knowledge or approval of misconduct would be harder to prove. The bank's board will not authorize anything other than laying out the money for a defense for the officers. If extracting settlements is the DOJ's motive for indicting a firm, however, it is unworthy. This is the Department of Justice, after all, not the Internal Revenue Service.

Breaking up the big banks is a serious matter. It is likely to have an effect on economic growth, jobs, and the ability of U.S. companies to function around the world. Whether the benefits of breaking up the banks outweigh the adverse consequences that such a step will incur is what the debate should be about, not diversions about whether it's possible to indict a bank or a corporation.  

The immediate cries of faux outrage over the Attorney General's statement from people who want to use "Too Big to Jail" for their own political purposes are more appropriate for a lynch mob than the kind of reasoned debate we ought to be having about the future of the biggest U.S. banks.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.


(11) Comments



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Posted by rogerbev | Wednesday, March 13 2013 at 7:51PM ET
I understand Mr. Wallison's point, but as Jim Wells noted above what seems to be driving the chatter on Capitol Hill is the fact that no one has been held to account - no individuals, no corporations, nothing. Settlements
Posted by rogerbev | Wednesday, March 13 2013 at 5:53PM ET
As a community banker for more than 30 years, I assure you the cries of outrage over Wall Street's preferential treatment are 100 percent genuine. Not only were the institutions that fueled the financial crisis propped up with taxpayer funds, they are now apparently immune from criminal prosecution, as recently verified in sworn testimony before Congress by the Attorney General of the United States. If regulators decide to close a community bank on Main Street, its owners' personal savings and livelihoods are decimated. Yet time and again Wall Street megabankers are shielded through a crisis of their own making because of the systemic risks they've created. Their exemption from criminal prosecution is just the latest example. It's time for the gloves to come off. Prosecutors should pursue justice on Wall Street, and policymakers must take a close look at how these megabanks are structured to determine whether they should be downsized to reduce the risks they pose. Our nation cannot afford to keep letting Wall Street off the hook.
Posted by tjorde | Tuesday, March 12 2013 at 9:04PM ET
Bank is people. If the people in the bank perpetrate misbehavior and the banks chose to be silent DOJ would be left with no option but to break the institution in the interests of the rest of the stakeholders. Tax payers cannot be expected to pay for the wanton follies of the bankers and banks how big they may be and how worthy they may for defense otherwise.
Posted by yerram | Monday, March 11 2013 at 10:44PM ET
Looking at this issue dispassionately, it makes very little sense to bring felony charges against a corporation, particularly a financial firm, of any size unless the firm truly is a criminal organization (hyperbole aside). The Arther Andersen case is a perfect example. The felony case dealt with the shredding of documents, and the standard that the court was asked to consider was whether any one among the 28,000 employees had done it. Of course, the court did find that it had happened, and the whole firm was convicted, it went out of business, and the vast number of employees who had no involvement in the wrongdoing were certainly involved in the consequences of the conviction. With regard to individuals, only one person was charged and convicted in connection with this action, yet all of the employees paid the price. An absurd outcome. This issue is not about banks, it is about the miscarriage of justice in bringing felony charges against a financial firm, bank or otherwise. If there is illegal activity, some individual made the decisions for the action to take place. Take action against the culpable people.
Posted by WayneAbernathy | Monday, March 11 2013 at 6:30PM ET
I'm with Jim Donahue. Using Holder's logic, no organized crime bosses would ever have been jailed because the Mafia/La Cosa Nostra was Too Big To Prosecute as a single entity.
Posted by jim_wells | Monday, March 11 2013 at 5:40PM ET
Two words - RICO Act.

It's only been used once against a Wall Streeter.

It's time to dust it off and start throwing Bankers in the can on a wholesale basis.

Someone makes the decisions to go ahead and act criminally. Those people should be jailed and restitution to the victims ordered.
Posted by Jim Jackson | Monday, March 11 2013 at 5:35PM ET
The Too big to fail/jail financial firms are now trouting out their army of mouthpieces. The TBTF/J banks must be really worried about the traction the "break up the big banks" is getting. So time to say "jump" so that their water carriers like Wallison can say "how high".
John Adams said "Facts are stubborn things". And the facts are not on the side of the TBTF. So the TBTF banks are doing what Mark Twain advised -"First get the facts, then you can twist them all you like."
This defense of the indefensible is making me sick.
Posted by commobanker | Monday, March 11 2013 at 5:24PM ET
President Richard Fisher has the simple solution. Carve out commercial banking only from these behemoths and only provide FDIC coverage for those deposits, otherwise if these giant holding companies, selling everything from equities to tupperware break the law, string 'em up!
Posted by Tmcgraw | Monday, March 11 2013 at 5:20PM ET
Unless I missed something, the outrage is over pursuing ONLY a monetary settlement with the banks without pursuing legal actions against the individuals running the money laundering and terrorist financing businesses, and considering sanctions on the bank's charter.
Posted by jim_wells | Monday, March 11 2013 at 5:01PM ET
I always appreciate hearing from Peter Wallison, the guy who thinks the Great Crash was the fault of evil borrowers, not his innocent friends on Wall Street and their colleagues in the mortgage origination business. With a track record like that, this is for sensible people an absolute endorsement of the concerns behind to big to jail.
Posted by Ed Walker | Monday, March 11 2013 at 4:55PM ET
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