When banks face criminal charges

By Felix Salmon
January 29, 2013
question raises itself: what is the point of filing criminal charges against a bank -- not a bank's executives or employees, but the bank itself?

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Once again the question raises itself: what is the point of filing criminal charges against a bank — not a bank’s executives or employees, but the bank itself? The WSJ today says that the US wants RBS to plead guilty to such charges, in addition to paying the inevitable fine over Libor fixing. But only, it seems, insofar as such an admission wouldn’t have any visible practical consequences:

As part of UBS’s settlement last month, the Swiss bank’s Japanese unit pleaded guilty to wire fraud, a felony. Justice Department officials were heartened by the lack of a negative reaction in the markets and among regulators around the world to UBS’s guilty plea. Before the settlement deal, some officials had worried it could destabilize the bank. That has emboldened officials to pursue similar actions against banks like RBS.

Does “banks like RBS”, here, mean all of the banks which are going to settle Libor-rigging charges in the future? If so, it almost certainly includes US banks. And that in turn means that shareholders in such banks should be worried about potentially owning stock in a self-admitted criminal enterprise. On the other hand, maybe shareholders care only about the share price, and can take solace in the fact that Justice only seems to want to file criminal charges insofar as there’s a “lack of a negative reaction in the markets”.

The spectre everybody’s afraid of here is that of Arthur Andersen, which was prosecuted for obstruction of justice in the wake of the Enron scandal, went out of business as a result, and only later saw its conviction overturned by the Supreme Court. By that point it was too late: 25,000 jobs had been lost, and the accounting industry had become even more consolidated than it was before.

As a result, Justice seems to be treading very carefully here, prosecuting UBS — and, now, probably RBS as well — only with respect to activities in far-flung Asian outposts that no one cares much about. Think of it as the diametric opposite of the way that prosecutors went after Aaron Swartz: the US in this case is being minimally rather than maximally aggressive.

The problem is that this m.o. seems to violate a basic principle of justice — the principle that where there is a crime, there should be a punishment. Put the fines to one side: they will happen anyway, whether the bank admits to criminal activity or not. The criminal prosecution, in these cases, seems to be little more than a CYA move on the part of the administration, which can now have a slightly straighter face when saying that it’s being tough on the banks.

Still, maybe the markets should be more worried about such admissions than they’ve shown themselves to be until now. If a bank with a substantial US retail operation — JPMorgan Chase, say — admits to criminal misconduct, that doesn’t just open itself up to lawsuits from people who bought instruments linked to Libor, but also hands a whole new ammunition clip over to the opponents of big banks generally. Remember that most of the Dodd-Frank law still has yet to be written, including the details of the Volcker Rule; the worse the light the big banks are seen in, the tougher that regulators are going to allow themselves to get.

And then there’s the question of local prosecutors and regulators. The Justice Department might be very solicitous here, but that doesn’t mean that aggressive state attorneys general will follow suit. Once a bank has admitted criminal wrongdoing, its banking license in New York or any other state could surely be in jeopardy. And once a bank loses its banking license in New York, it’s basically dead in the water.

Justice, then, needs to ask itself what exactly it’s trying to achieve with these criminal admissions. In principle, I’m all in favor of holding criminal organizations to account for their actions. But only if doing so does more good than harm.

7 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I would argue that by preserving the rule of law, and by putting a trophy on the wall, the criminal convictions “does more good than harm.”

The perception of impunity serves to make all the players in the market less honest, and hence undermines the whole market, and arguably the whole society.

Posted by Matthew_Saroff | Report as abusive

“In principle, I’m all in favor of holding criminal organizations to account for their actions. But only if doing so does more good than harm.” – Honestly Felix what utter hogwash. Does the DoJ or local DA care if a trash hauler goes belly up when prosecuting the mafia ?

You can’t be a nation of laws if you treat the banks differently. One law for the rich and connected, another for the rest of us ?

You are mistaken sir and should apologize to your readers

Posted by iamamartin | Report as abusive

Felix, a question related to the topic. I have always wondered what happens with all these millions in fines that the government collects? Where is that money sent to? And what is done with it? Because it seems it can become a very profitable business to keep accusing all these banks and collecting all those fines.

And in relation to your post, I see that the only way these banks could stop all the wrongdoing is if we start directly sending to jail all the people involved in those dirty deals.

Posted by Engels | Report as abusive

You prosecute the individuals and use respondeat superior to walk it up the chain.

Punish the individuals all the way up to and including the board.

Posted by Zdneal | Report as abusive

Felix,

“Moderation in the pursuit of justice is no virtue” Barry Goldwater

Posted by crocodilechuck | Report as abusive

“In principle, I’m all in favor of holding criminal organizations to account for their actions. But only if doing so does more good than harm.” – Honestly Felix what utter hogwash. Does the DoJ or local DA care if a trash hauler goes belly up when prosecuting the mafia ?

You can’t be a nation of laws if you treat the banks differently. One law for the rich and connected, another for the rest of us ?

You are mistaken sir and should apologize to your readers

Posted by iamamartin | Report as abusive

Felix Salmon appears to be in the short term thinker camp in that his ability to understand what underlies a successful society is limited. I know it is difficult to think beyond the expediency of the moment for those predisposed but adult action requires that you do not have ants in your pants driving your logic.

Believe it or not there is a role for justice and morality in the equation concerning a successful society (and that includes a successful economy). You rig justice and the economy of a society for short term goals and what you achieve is the disincentive of those who make that society work. That idea may be difficult for the current batch of thinkers (and powers that be) to comprehend but was not very difficult to those who founded the United States.

Posted by keebo | Report as abusive