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.