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.