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Why Recent Bank Guilty Pleas Just Aren't Enough

After the "too big to jail" debate took off in 2013, the Chicken Little moment defenders of big banks dreaded came in May of last year. Five institutions — Citigroup, JPMorgan Chase, Barclays, Royal Bank of Scotland and UBS — actually copped pleas to having conspired to commit felonies related to foreign exchange trading. With a little help from their regulators, the sky did not fall.

These convictions followed previous guilty pleas for crimes limited just to foreign banks. In 2014, Credit Suisse pleaded guilty to a U.S. charge dealing with tax fraud, and BNP Paribas entered a guilty plea for allowing transactions with countries under U.S. sanctions.

But if the Department of Justice is going to make any headway in 2016 in convincing critics that it is serious about prosecuting systemically important banks, these guilty pleas just aren't enough. Indeed, the recent pleas, including those over the forex scandal, were defined by a bunch of curious things that didn't happen. No licenses were yanked. No charters were revoked. No one went to jail. No pension funds switched banks. Share prices did not plummet. The Securities and Exchange Commission and other regulators signaled that, despite being felons, these big institutions were not such bad actors after all. In short, life went on pretty much as it always had. Nothing to see here, folks, move along.

Let's review how the "too big to jail" issue first picked up steam. In 2013, then Attorney General Eric Holder gave the "too big to fail" institutions a hall pass on obeying criminal laws when he testified before a congressional panel that some banks were just too scary to prosecute because of the ripple effects of doing so. This prompted an immediate outcry from critics claiming it showed banks being "above the law." Wasn't their taxpayer bailout offensive enough?

After weeks of temporizing, Holder finally admitted that, yes, TBTF banks were subject to our country's criminal statutes. But DOJ observers' response: "Show me."

The recent pleas still haven't convinced anyone. In truth, some argue that recent convictions have made the situation worse by trivializing felony charges for the big banks but not for everyone else.

That said, the story isn't over, both in terms of the government's prosecution of financial institutions and executives. After the appointment of current Attorney General Loretta Lynch last year, Deputy Attorney General Sally Yates gave a widely publicized speech in which she argued that the department was committed to prosecuting individuals for white-collar crimes.

So far our elite financial institutions have benefited from not one but two forms of bailout. In addition to the unprecedented backing for their unsecured creditors in the 2008-9 financial crisis, there is the rescue of more recent vintage in which these same institutions are bailed out from the collateral consequences of their admitting to having engaged in criminal activities.

We ought to be paying more attention to the bailouts of the second variety. But big-bank advocates won't readily acknowledge the sweetheart deals these banks have received in return for guilty pleas.

Recently, I had a chance to attend the annual conference in New York sponsored by The Clearing House, the lobbyist for the big banks. During one of the panels, in which the moderator discussed the benefits of the limited collateral damage from recent guilty pleas, I attempted to question the participants during the Q&A session about whether that was in fact good public policy. But I never got an answer as my question was ruled out of order by the moderator.

No reasonable person that I know of is arguing that a criminal conviction should automatically carry with it nuclear consequences for a TBTF bank. It would, of course, for a community bank. Most would argue, however, that there should be some proportionality between the offense and the punishment. As it stands now, there is no proportionality, just a "Get out of Jail Free" card for the big-bank perpetrator.

Cornelius Hurley is director of the Boston University Center for Finance, Law & Policy, and a former assistant general counsel for the Federal Reserve Board.


(4) Comments



Comments (4)
A tip of the hat for asking the uncomfortable question in the middle of the lion's den. The fact that a question about the consequences of collateral damage was ruled "out of order" provides some insight: apparently, the notion of "good public policy" is better defined in the modern star chambers when the empire is in a state of decline. The Senate Banking committee seems more interested in demolition these days, and the planning horizon grows shorter by the day. Any hope for civil justice on Wall Street may have to give way to a new reign of terror - the call for "a la lantern" may be the only recourse if the capture of the legal and regulatory system is truly complete.
Posted by teknoscribe | Monday, January 18 2016 at 9:42PM ET
Excellent column. Guilt should have real consequences. If the Department of Justice lacks the resources to prosecute to the full extent organizations that are highly complex, in cases that are highly complex, then it needs to be given those resources. If it is not, then questions will remain about how serious the government is about applying the rule of law regardless of the economic significance and political clout of those being investigated.
Posted by diericbridge999 | Wednesday, January 13 2016 at 5:39PM ET
I disagree with the conclusion. I believe that if a prosecutor had evidence of a possible bank crime, he would seek a criminal prosecution. In light of the burden of proof and the necessity of showing intent making a white collar prosecution is difficult especially in a large bank with hundreds of employees. While banks like corporations can be civilly and criminally liable for the acts of their employees, this respodiate superior does not go to individuals unless they participate in some wrongdoing.

While it may be a wonderful concept, and certainly a political football, to "throw bankers in jail", one needs to understand the judicial limitations.
Posted by robser | Tuesday, January 12 2016 at 11:14AM ET
The big banking industry has been poorly served by (most of) its leaders and industry associations, who won't face up to the fact that these serial and serious misdeeds are unacceptable in any honest markets over time. Whining about regulatory burdens (which are indeed growing substantially) will not address the core problems of mismanagement, compliance failure and lobbying that are among the reasons for the growth in regulation in the first place. Whatever happened to Gov. Pawlenty's advice to banks that they "need to stop doing stupid things"? We can and should expect far better from leaders and their representatives.
Posted by Lawrence Baxter | Tuesday, January 12 2016 at 11:12AM ET
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