In the years following the financial crisis many have wondered (with varying degrees of incredulity) why no senior banking executives were criminally prosecuted.
Instead, as John Cassidy writes in the New Yorker, there’s been a succession of monster settlements between financial institutions and the US Justice Dept.
“We seem to have stumbled into a new form of corporate regulation,” I noted at the time of the JPMorgan settlement [November 2013], “in which nobody in the executive suite is held personally accountable for wrongdoing lower down the ranks, but the corporation and its stockholders are periodically socked with huge fines for past abuses.”
To the extent explanations for the failure to prosecute have been offered, they usually come down to two things.
First, although foolishness and cupidity were ubiquitous in the years leading up to the crisis, proving intent to defraud can be a tricky business as the Justice Dept discovered in its attempt to prosecute two Bear Stearns bankers in 2009.
Second, there’s the “we might end up destroying a systemically important bank” excuse. In other words, the Justice Dept version of “too big to fail”.
Although establishing guilty intent isn’t easy, the difficulty has been overblown. Consider, for example, that as part of these settlements the institutions often effectively admitted to fraudulent behaviour.
The statement went on: “JPMorgan employees knew that the loans in question did not comply with those guidelines and were not otherwise appropriate for securitization, but they allowed the loans to be securitized—and those securities to be sold—without disclosing this information to investors.”
And there were far worse cases, like Goldman Sachs selling securities from their own portfolio to clients when they internally (and quite explicitly) viewed these instruments as toxic and were desperate to unload them before everything fell apart.
And the second reason? Quite apart from the unacceptability of such a two-tiered legal structure on democratic and moral grounds, criminal cases related to “tax evasion and the violation of economic sanctions” were brought against two major overseas banks this year.[1] Both Credit Suisse and BNP Paribas pled guilty and paid fines of US $2.5 billion and US $8.97 billion respectively and the world didn’t end.
If the government can bring criminal charges against Credit Suisse and BNP Paribas for violating American laws, why can’t it mete out the same treatment to JPMorgan and Bank of America, or to some of their employees? Perhaps Holder will address that question in his memoirs.
Cassidy’s right but I’d go a step further. Since individual executives were not charged in either of these two criminal plea bargaining cases, their deterrent effect is doubtful.
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1 The Justice Dept’s strong arm tactics, particularly in BNP Paribas’ case, are both dubious and dangerous. In hounding the bank for alleged sanctions violations, the US was using its control of the international financial settlements architecture to pursue foreign policy goals. As noted here, this is likely to have unintended long term consequences.
Money, Credit & Financial Systems 