COLUMN: UBS and too-big-to-punish – James Saft
Dec 26 (Reuters) – As well as too-big-to-fail it looks as if
we must think of our largest banks as too-big-to-punish as well.
After comments from top U.S. Justice Department officials in
the wake of the $1.5 billion settlement with UBS over
interest-rate manipulation, the bank’s counterparties,
employees, clients and competitors certainly will.
UBS was fined and a subsidiary pleaded guilty to one count
of felony wire fraud over its part in a wide-ranging effort to
doctor key benchmark interest rates such as the London Interbank
Offered Rate (Libor).
The combined fines and disgorgement UBS has made to
regulators in Britain, Switzerland and the U.S. were big – three
times larger than those paid by Barclays in a related scandal.
Comments made by U.S. Attorney General Eric Holder and Lanny
Brauer, head of the Justice Department’s criminal division,
however, indicate that UBS very likely got off more lightly than
you, me or the local credit union might have done had we
committed the same offenses.
Asked after the deal was announced why UBS was not
criminally charged at the parent company level, Breuer replied:
“Our goal here isn’t to destroy a major financial
institution,” according to remarks reported on twitter by
Financial Times correspondent Shahien Nasiripour.
“In the world today of large institutions where much of the
financial world is based on confidence one of the things we want
to ensure as we come forward to a right resolution is to ensure
that counterparties don’t flee an institution, that jobs are not
lost, that there is not some world economic event that is
disproportionate to the resolution we want.”
Asked at the same press conference about financial stability
concerns and the criminal prosecution of banks, Holder trod a
“The impact on the stability of the financial markets around
the world is something we take into consideration. We reach out
to experts outside of the Justice department to talk about what
are the consequences of actions that we might take, what would
be the impact of those actions if we want to make particular
prosecutive decisions or determinations with regards to a
Now of course it would be silly to expect them to act
without consideration of the consequences of their actions, but
the fact that they seem so cautious over the knock-on effects of
a full-tilt prosecution of a major bank is disturbing.
The worry, presumably, is that prosecution could bring down
a bank, thereby setting in train the kind of round-robin of
counterparty panics and failures regulators feared after the
failure of Lehman Brothers.
That’s possible, but a world in which prosecutors need to be
mindful of not upsetting confidence in banks which have behaved
criminally is one in need of reform.
HOW NOT TO RUN A RAILROAD
We don’t know if bringing down a major bank would cause more
damage than benefit. My guess is that we overestimate the
damage. We do know that being the politicians or government
official who does so is a role with more risk than reward.
Therefore even if the DOJ’s mindfulness over the fate of UBS
is prudent, it fully and horribly illustrates why
too-big-to-fail is intolerable. These kind of statements cement
in the minds of executives, employees and counterparties that,
theoretically at least, justice is not blind when it comes to
our largest banks.
That must act as an incentive to wrong-doing, and almost
more importantly, an incentive for the “TBTF” to never willingly
relinquish that status. I haven’t got a strong opinion about
whether UBS was dealt with harshly enough, but I do worry that
those making the decisions about how to deal out justice are
hamstrung by a set of government policies which, in effect,
enshrine too-big-to-fail status for our largest banks.
Let’s think about other industries, and consider our
reaction if they were treated with kid gloves in the same way.
Remember, what UBS was accused of was subverting one of the
central price setting mechanisms which it is its privilege to
take part in. What if a regional hospital, dominant in its
market, escaped the full penalty of the law for price gouging
because of the fear of what its end might mean for hospital
service in that region? What would be the long-term effect on
healthcare of that, I wonder?
Or what if we went easy of the manufacturer of unsafe
airplanes because we were worried about losing a national
champion in that industry? I know I’d start taking the train.
The point is not that prosecutors should take no account of
collateral damage, but rather that the largest banks should be
rendered forcibly smaller so that a financial panic is no longer
even a minor consideration in punishing criminality.