The story behind the big Wall Street news of the day — a guilty plea by Swiss bank Credit Suisse to criminal charges of conspiring to aid tax evasion — sounds a bit like a true-crime thriller. It’s got all the dramatic elements: a major Wall Street bank pleading for mercy (“With a quiver in his voice, the [bank] lawyer urged prosecutors … ’ Please don’t do this’”), tough prosecutors who refuse to be cowed, justice for an industry that hasn’t seen much of it lately. (It was the first guilty plea by a major financial institution in two decades.) And you might read it and think that, as DealBook puts it, “the case signals a shift in federal prosecutors’ approach to Wall Street.”
But despite its narrative grandeur, Credit Suisse’s guilty plea is actually fairly low stakes.
The context of the Credit Suisse case is, essentially, one of prosecutorial desperation. Embarrassed over having failed to punish any of the executives involved in creating the 2008 financial crisis, prosecutors and regulators have been searching for a way to appear tougher on banks. Charging large financial institutions with criminal acts is a delicate business, because forcing a guilty plea can punish innocent workers by putting entire firms out of business (see: Andersen, Arthur) — which is why these cases are almost always settled with fines and deferred prosecution agreements. But in this case, law enforcement officials weren't going to settle for financial restitution. "Too big to jail" be damned — they were going to force some pleas.
The pair of banks they seem to have targeted — first Credit Suisse, and, perhaps soon, BNP Paribas, a French bank that is said to have violated U.S. sanctions on countries like Sudan — are sensible test cases. They're both firms with little presence in America, and neither has the same kind of retail footprint as Bank of America or JPMorgan Chase. If, as the banks have warned, a guilty plea could put them out of business entirely, these banks' disappearances wouldn't matter much to the vast majority of Americans. (Not that either of these banks will disappear — as Credit Suisse's CEO noted yesterday, the guilty plea will likely have "no material impact on our business." Tellingly, Credit Suisse's stock price is up 1.5 percent today.)
There's nothing wrong with forcing Credit Suisse and BNP Paribas to plead guilty. They broke the law, and we should at least want to see what the collateral consequences of a guilty plea are for large financial institutions.
What worries me is that prosecutors seem to think that these cases somehow rebut the "too big to jail" theory. ("This action should put that misguided notion definitively to rest," Attorney General Eric Holder crowed yesterday, announcing the deal he'd made with Credit Suisse.)
If Holder honestly thinks that getting tough with Credit Suisse over tax evasion will quell the public's ire, he's badly mistaken. The "too big to jail" outcry wasn't about a lack of prosecutions of banks in general. It was a response to a specific set of offenses — mainly ones having to do with the credit crisis, and concentrated at firms like Lehman Brothers, Bear Stearns, Goldman Sachs, and AIG. People wanted justice for Fabulous Fab, "shitty deal," robo-signing. They wanted Dick Fuld to face the music. They wanted Angelo Mozilo under lock and key.
Instead, as Jesse Eisinger notes, they got 30 months for Kareem Serageldin, a structured-credit trader from — where else? — Credit Suisse.
Given that the statute of limitations has (maybe?) expired for almost all the major acts of the financial crisis, the public's desire for accountability for the acts of 2008 and 2009 will almost certainly go unfulfilled. So prosecutors will have to make do with a tougher stance going forward.
That's fine. But looking for precedent in the Credit Suisse and BNP Paribas cases is probably expecting too much. For one thing, as DealBook's tick-tock of the Credit Suisse fracas shows, these negotiations are intensely time- and resource-consuming. If you're a prosecutor or a regulator, you've got to not only hammer out the details of a settlement (and listen to months of pleading and whining from the general counsels), you've got to have the requisite "government-to-government" conversations if a foreign bank is involved, and bring in the Federal Reserve to assess "the potential fallout from a criminal case." Each prosecution becomes its own little stress test, with each party wanting to suss out all the possible outcomes of a guilty plea and determine how much the market can bear.
This cautious, tiptoe approach isn't what anybody asked for. And, like Preet Bharara going 80-for-80 on insider-trading convictions while letting much larger fish swim by, it smells a little like misdirection.
What we've learned since 2009 is that the prosecution of complex financial crimes is a zero-sum game. With limited resources and a ticking clock, every case you choose to prosecute fully has to be carefully selected, with the most important determinant questions being "will I win this?" and "how long will it take?" Insider trading cases are easier to convict on than mortgage fraud cases; accordingly, they get more attention. Tax evasion is lower-hanging fruit than CEO misbehavior, so it's naturally where prosecutors want to direct their attention.
That's understandable, and forcing guilty pleas on lesser charges is perhaps better than the alternative. But let's not conflate issues here. "Too big to jail" isn't a controversy about how banks will be treated in the future. It's a scandal about how they've been treated in the recent past. And no number of guilty pleas is likely to calm the public down, especially when the pleas seem to have so few real-world consequences.