Prosecutors are considering bringing criminal charges against two overseas banks for charges ranging from perjury and fraud to laundering money. As detailed yesterday by a trio of Bloomberg News reporters, the key takeaway from the banking community was reflected in the headline: “Criminal Charges Against Banks Risk Sparking Crisis.”

The reaction has been swift. “Don’t’ play with matches” exhorted Sanford C. Bernstein banking analyst Brad Hintz. Former Federal Reserve lawyer Gil Schwartz warned “The mere threat of requiring a hearing could cause customers to lose confidence in the institution and could cause a run on the bank.” U.S. Attorney Preet Bharara recounted the picture bankers painted if prosecutions occurred: “Oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”

These quotes reflect a shift in both psychology and game theory, post-financial crisis. It used to be thought that fear of indictment, personal disgrace and threat of jail would keep bankers from engaging in illegal activities. But the extraordinary intervention of the U.S. government and Federal Reserve changed the dynamics of prosecution.

In 2009, the recovery was fragile, and besides, we had just sunk all that cash into bailing out the banks. Busting those who committed financial crimes would risk undoing all of that. Prosecute our clients, said the bankers’ lawyers, and you risk destabilizing a fragile financial system. Put a systemically important financial institution in your cross hairs, and you put the entire global economy at risk.

The Bush and Obama administrations bought this line of reasoning.

This argument should never have carried the day. The job of a prosecutor is to prosecute, not to make economic forecasts. Convincing various governmental departments not to do their jobs was a masterful act of salesmanship, one that undercut fundamental principles of rule of law.

It isn’t the role of the Justice Department, the Securities and Exchange Commission, or the U.S. attorney’s office to make assessments based on the forecasts of economists doing the bidding of their paymasters. In case you haven’t noticed, the practitioners of the dismal science have a dismal record at predicting the future. They can’t even tell you what just happened, so why should anyone believe they know what the future holds? For those charged with enforcing the law, it was an epic abdication of responsibility– and just because some economist frightened you.

Ignoring fraud, perjury and other felonies was a colossal error of judgment. Jesse Eisinger details the history of the rise of corporate impunity. It is a thorough explanatory article that delves into the many institutional forces that led to this sorry state. It is a must read for anyone interested in knowing how and why this prosecutorial failure came about.

As we noted last month, “The greatest innovation of the financial sector is not the ATM machine or interest-bearing checking accounts or securitization: It was convincing the powers that be that prosecuting them for their actual crimes would (once again) bring the economy to the edge of the abyss.”

It is long past time for this attitude to change. Testing the waters with a few foreign banks or banks that are not too big to fail is a modest start. But I am not holding my breath waiting for TBTF prosecutions anytime soon. The statute of limitations is ticking and will soon place many of those responsible beyond reach. Justice denied makes it more likely we will be subjected to a future financial crisis.

Originally published here

Category: Legal, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Finance’s Greatest Innovation: “Don’t Prosecute Us’”

  1. WickedGreen says:

    Too late.

    “Banks Take the Economy Hostage” … why not? They bought the government a while ago, which obviously turned out to be a really really good call.

    I personally don’t care if Preet individually frog-marches Jamie and Lloyd in cuffs down Madison Ave. at this point.

    Nobody under a certain age, and especially those lacking re-reflated assets to feel better about, has any faith in regulations, oversight, or those neat “laws” we hear about from time to time.

    But we’re all flat broke in a race to the bottom of the income barrel. So we play their game.

    “They got ya by the balls” – G. Carlin
    “The trouble with the rat race is that even if you win, you’re still a rat” – L. Tomlin

    After 6 years, the inevitable conclusion is inevitable. Of course, this well-warranted cynicism is a contrarian buy signal.

    • rd says:

      The perfect movie scenario that explains the DoJ’s position on prosecuting the banks:

      [the Johnsons load their guns and point them at Bart. Bart then points his own pistol at his head]

      Bart: [low voice] Hold it! Next man makes a move, the n*****r gets it!

      Olson Johnson: Hold it, men. He’s not bluffing.

      Dr. Sam Johnson: Listen to him, men. He’s just crazy enough to do it!

      Bart: [low voice] Drop it! Or I swear I’ll blow this n****r’s head all over this town!

      Bart: [high-pitched voice] Oh, lo’dy, lo’d, he’s desp’it! Do what he sayyyy, do what he sayyyy!

      [Townspeople drop their guns. Bart jams the gun into his neck and drags himself through the crowd towards the station]

      Harriet Johnson: Isn’t anybody going to help that poor man?

      Dr. Sam Johnson: Hush, Harriet! That’s a sure way to get him killed!

      Bart: [high-pitched voice] Oooh! He’p me, he’p me! Somebody he’p me! He’p me! He’p me! He’p me!

      Bart: [low voice] Shut up!

      [Bart places his hand over his own mouth, then drags himself through the door into his office]

      Bart: Ooh, baby, you are so talented!

      [looks into the camera]

      Bart: And they are so *dumb*!

      Mel Brooks’ Blazing Saddles 1974.

  2. rd says:

    The really big innovation was convincing the prosecutors not to prosecute individuals but to make the prosecution cases about the institutions themselves. The TBTF banks can only make the systemic crisis argument if the institutions themselves are endangered. However, you could prosecute dozens of people in each institution and it would hardly blink. Throwing the individuals who actually made the decisions and committed the acts into prison or barring them from the business while exposing them to civil lawsuits would change behavior very fast in the rest of the population.

    Historically, the individuals would get prosecuted, not the companies. That is what has been occurring with insider trading cases. The traders themselves get prosecuted while the institution cuts ties with them and goes on its merry way. The only cases where it seems to get bigger than that are with hedge funds like SAC where there aren’t any people and it goes to the very top, so prosecuting the individuals significantly changes the business.

  3. lucas says:

    Meanwhile bank managers tell their little depositors that they must charge account maintenance fees and pay no interest on those accounts because bank profit margins are razor-thin. Nevertheless, these same banks pay huge fines that pundits claim are merely the costs of doing business. Where do these fines go anyway? How about requiring banks to divvy up the fine among the little depositors?

  4. MikeR44 says:

    Why would anyone trust a bank in a country that allows the bankers to commit fraud with impunity. The world is upside down. It’s nuts! Mike