Are banks too big to indict?

January 24, 2014

The great 19th century English jurist, Sir James Fitzjames Stephens, once wrote that murderers were hung not for reasons of revenge or deterrence — but to underscore what a serious breach of the social compact had been committed.

Federal District Judge Jed S. Rakoff was making a similar point when he recently called attention to the lack of criminal prosecutions in the wake of the 2008 financial crisis. Consider the 1980s Savings and Loan crisis. The losses were minuscule compared to this recent paroxysm, but they still led to hundreds of criminal convictions.

That looks highly unlikely here. The federal statute of limitations for fraud, generally five years, is rapidly running down. There are reportedly a few cases in process. But the odds are that if there are any indictments, they will be in the pattern of the indictment of Goldman Sachs banker Fabrice Tourre, who has been left holding the bag for a complex scheme to load up clients with worthless securities. Email trails leave little doubt that far more senior figures were aware of the purpose of the deal. The firm also executed other similar deals that haven’t been prosecuted.

The big banks have compiled an amazing record of dishonest, and outright criminal, behavior — suggesting that there is no ethical or legal standard that can stand in the way of a chance to fatten the bottom line. Here are some samples, all drawn from the cases settled in the 2000s:

Chase Bank (now part of JPMorgan Chase), Citibank, Merrill Lynch and a number of other financial institutions actively conspired with Enron executives to falsify company financial records. Chase also paid bribes to county officials, and to other banks, for the right to entangle an Alabama county in a byzantine transaction that led to the county’s bankruptcy. Virtually every major bank in the country sold billions in “auction-rate-securities,” without disclosing they carried the risk of becoming nearly worthless — which quickly came to pass. Bank of America has now disgorged $22 billion in fines on these instruments alone.

HSBC, UBS and a number of other European banks, meanwhile, created a lucrative business expressly aimed at facilitating U.S. tax evasion. HSBC and Bank of America enabled billions in drug money laundering. HSBC, Credit Suisse, Barclays and Lloyds created units with the express purpose of violating U.S. laws — which they had sworn to uphold — against facilitating money transfers for named terrorist regimes.

Wachovia (now part of Wells Fargo) had, over the years, transferred at least $378 billion from Latin America, a money flow clearly associated with the drug trade. Bank of America and Wachovia also assisted in the purchase of commercial jets for drug lords. Chase Bank, again, most glaringly, but other banks as well, violated their internal control standards to enable Bernie Madoff’s Ponzi scheme.

In the run-up to the 2008 credit crash, Bear Stearns (now part of JPMorgan Chase), Morgan Stanley, and other banks undertook frantic last-minute campaigns to unload worthless mortgage securities [paywall] on unsuspecting customers. When the mortgages failed, Bear Stearns extracted lucrative settlements from the original mortgage lenders, without telling the customers that Bear had sold the worthless mortgages to. So they got paid coming and going, while their customers bore all the losses. (The emails apparently leave a clear trail suggesting that senior management was fully informed.)

More recently, a cabal of bankers was caught manipulating the most widely-used short-term money market base rate (LIBOR, or the London Interbank Offering Rate) to improve their trading profits — at the expense of borrowers throughout the world.

Rakoff is a former chief of the securities fraud unit in the office of the U.S. attorney for the Southern District of New York, so he is sensitive to the problems of enforcement. He notes that the Securities and Exchange Commission, in the wake of its Madoff embarrassment, was obsessed with Ponzi schemes and also committed to several big insider trading cases. Federal investigative resources, meanwhile, were heavily weighted toward terrorism.

On top of that, the new Obama administration, having seen the collapse of one large financial institution after the other, quite reasonably feared that an aggressive prosecutorial program might derail their efforts to put the banks back on a stable financial footing. President Barack Obama had little experience in finance, and his closest economic advisers — men like former Treasury Secretary Robert Rubin (former Goldman Sachs co-chairman), former Deputy Treasury Secretary Lawrence Summers, former Commerce Secretary William Daley (former JPMorgan Chase executive) and Timothy Geithner, the former president of the Federal Reserve Bank of New York whom Obama named Treasury secretary — would all have made that argument.

The most telling example of a scare for the administration was the 2002 collapse of the accounting firm Arthur Anderson, after it had been indicted for its contributions to the Enron scandal.

But, as Rakoff points out, there is a big difference between indicting a company, and indicting a handful of executives. A proper response would have been to continue with the rescue operations — and separately empower a crack team of prosecutors and investigators working in secret to build a half-dozen exemplary cases.

Rakoff is clearly right in principle. But he may be understating the difficulty of nailing senior executives beyond a reasonable doubt in cases like this. Most of the indictments in the savings-and-loan cases, for example, were based on well-documented embezzlements of depositor money. The blockbuster insider trading convictions usually turn on wire taps that capture the actual passing of the illegal information. In the crash-related cases, however, email trails are often the best evidence against senior executives. A skilled defense lawyer can readily exploit ambiguities and self-contradictions to undermine the certainty required in criminal prosecutions. Though the government won its case against Goldman’s Tourre, it had sued under a civil fraud statute that has a lower standard of proof.

There may be a better approach. Indicting a bank is actually a more fearsome, and more appropriate, weapon to deal with an institution that has a record of pervasive wrongdoing — because a criminal indictment effectively puts a company out of business. Just the credible threat of such an action would heighten the sensitivity of stakeholders and executives to criminal behavior on the part of underlings.

The obstacle is that the current banks, especially the largest ones spawned from forced mergers and shotgun marriages during the worst of the crisis, are so big that shutting them down could cause seismic economic tremors. But there is a substantial lobby of senior regulators, former bankers and federal legislators enamored of the idea of breaking up the banks.

They are far short of carrying the issue, but the obvious lack of effective sanctions against behemoth institutions strengthens their case. Simon Johnson, the former chief economist of the International Monetary Fund, has proposed that no bank should control assets in excess of 4 percent of gross domestic product. That’s now about $700 billion. Consider that JPMorgan’s current balance sheet is roughly 3-1/2 times that much.

Among the virtues of smaller banks is that it is easier to enforce stricter capital standards; their operations are typically more visible to regulators — and they’re not too big to fail.

Or to be criminally indicted and put out of business.



PHOTO (INSERT): From left to right, Lloyd Blankfein, chief executive of Goldman Sachs Group, Jamie Dimon, chief executive of JPMorgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, chief executive of Bank of America are sworn in before their testimony at the Financial Crisis Inquiry Commission and its first public hearing in Washington, January 13, 2010


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Thank you.

We need more intelligent articles like this.

When do the people awaken.

Fraud will continue until and unless there are those
that are punished. The message is clear, lie, cheat
steal and you will get a larger bonus, and if you get caught the company will cover it.

It really is a shame.


Posted by Alexaisback | Report as abusive


Jamie Dimon gets a raise while shareholders cover the Billions of dollars that were paid out in fines and penalties.

Does any of this make sense.

The stock goes up artificially as the Fed supports it.

And no one does anything.

30 years ago Dimon would have resigned in utter shame,
concerned of a loss (lawsuits).

Today his behavior is rewarded. And the message clear to all his underlings. Lie cheat and steal and you will be rewarded.

. It really is a shame.

Posted by Alexaisback | Report as abusive

There were three presidents involved in the crash: the first who set the stage by employing an entire gang of hucksters, the second who created the bailouts with a Wall Street insider, and the third who refined the bailouts with the return of the hucksters.

Larry Summers, one of the hucksters, wrote in his Reuters blog entry “Europe’s dangerous new phase” of July 2011 that “there must be a clear and unambiguous commitment that whatever else happens, the failure of major financial institutions in any country will not be permitted.”

The ship of state is sinking, but never mind the women and children; save the banks.

Obama could have appointed a regent to give the TBTF banks the Glass-Steagal treatment, not to mention prosecuting banksters. Standard Oil and AT&T were monster corporations when they were broken-up, but everything turned out okay.

Posted by baroque-quest | Report as abusive

Until investment banking is again separated from commercial banking any indictments (however improbable) having a positive effect will be short lived and temporary. The problem is also global. Too big to fail is global. It would take an unprecedented international cooperative effort to get banking back to the business of long term investment in companies and not short term or otherwise unproductive extraction of wealth from the global economy.

Posted by pantathalos | Report as abusive

High finance is largely institutionalized fraud/theft, but then so is government.

Cool Matt Mahurin artwork, BTW. Hadn’t seen his stuff in a while.

Posted by Zeken | Report as abusive

Congress is 100% fascist and the media is controlled by corporations bent on the corporate agenda. The voter can’t put one and one together. America is lost. Find somewhere else to live.

Posted by UScitizentoo | Report as abusive

When politicians and top bankers are on a first name basis…..nothing more needs to be said.

Posted by SaveRMiddle | Report as abusive

I’m thinking that not indicting these parasites is a
policy decision and that Barry must have approved it.

Posted by PhatBoyArDee | Report as abusive

It’s not just banks. All global or international corporations, especially those that are “public” are beyond the laws imposed on citizens. Even though “they are people too” they are not like you and me.

Posted by tmc | Report as abusive

The easiest way to solve the problem is to go back to the 1980’s model where interstate banking was limited and their was not the concentration of assets within the 20 largest banks. Get them out of the business of merging brokerage and other financial services.

Force banks to become more local–in the days when there were 15,000 chartered banks. We can still have some form of interstate banking for the consumer–ATM networks and credit/debit cards. Beyond that, the consolidation of wealth into the integrated “banks” (commercial and consumer banking, mortgage loans, brokerage services etc.) serves to work against the consumer and the economy.

Break them up, just like we broke up Standard Oil. Force them to compete. Do not allow them to trade for their own book, and stop institutionalizing the flow of money from one segment within the “bank” to another segment.

Most importantly, it will make it more difficult for the politicians to wield their influence.

Posted by COindependent | Report as abusive

Charles, they currently run the government…remember.

Posted by rikfre | Report as abusive

The people who should be indicted are those politicians who have been bought and paid for the by the banking lobby.

Posted by EconCassandra | Report as abusive

@COindependent: I thoroughly agree with your desire to return to limits on interstate banking. In addition to the ability to limit “too big to fail” or prosecute, it would also put banks back into the business of making economically useful loans. Much of the problem with current recovery stems from the fact that so much currency is tied up in the megabank speculative activity and not being loaned to small businesses. Unfortunately, we are approaching to situation where all of the traditional bankers who knew how to make good loans are disappearing, replaced by an entire generation of gamblers and crooks with degrees in “finance.”

Posted by QuietThinker | Report as abusive


Thanks to Charles Morris for writing it so well.

Thanks to Reuters for printing it.

Now, if only everyone would read it.

Posted by breezinthru | Report as abusive

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