No Bank Is "Too Big to Indict," but That Won't Stop This Bank Stock Bull Market

Caricature of Holder and Obama. Source: Flickr/DonkeyHotey.

Last March, Attorney General Eric Holder told the media that some banks are essentially "Too Big to Jail." The size and systemic importance of these institutions made it next to impossible to file criminal charges. It was simply too difficult and too risky. 

Observers from all sides of the political spectrum threw up their arms in exasperation. Just another example of the government failing to right the wrongs that led to the financial crisis, right?

Well, not exactly. Over the past year, Holder has repeatedly, aggressively, and successfully brought and won cases for a slew of abusive practices in the financial world. Citizens, pundits, and investors should all be pleased.

AG Holder's 2013 report card 
In March, Holder said, "I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute -- if we do bring a criminal charge -- it will have a negative impact on the national economy, perhaps even the world economy."

Most stopped reading right there, but Holder went on:

I think we have been appropriately aggressive; these are not always easy cases to make. When you look at these cases, you see that things were done "wrong," then the question is whether or not they were illegal. ... And I think the people in our criminal division ... have been as aggressive as they could be, brought cases where we think we could have brought them. I know that in some instances that has not been a satisfying answer to people, but we have been as aggressive as we could have been.

Has this approach proved successful? That answer largely lies in the eye of the beholder. Some say "yes," while others say "no way!" Here are some notable successes: 

  • Last March, the Justice Department announced a $1.92 billion settlement with HSBC (LSE: HSBA  ) for violations of anti-money-laundering laws.
  • In November, the Justice Department agreed to a $13 billion settlement with JPMorgan Chase (NYSE: JPM  ) for violations in its marketing and origination of mortgage-backed securities leading up to the crisis.
  • Goldman Sachs (NYSE: GS  ) stated that future civil claims from Justice Department investigations could cause a "signficant increase" in the company's liabilities.
  • Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) have both publicly released statements similar to Goldman's, acknowledging ongoing Justice Department investigations into pre-crisis violations.

No, there are no executives sitting in prison as a result of these actions. Just as Holder said last year, proving criminal intent is much more difficult than attaching civil liability. But where criminal charges have fallen short, Holder has been plenty aggressive on the civil front. As reported by CNN, the government increased fines on banks by more than 100% from 2012 to 2013.

And according to Holder, there's more to come in 2014. Last month, he said the Justice Department intends to bring suits against several major financial institutions early in 2014. He even went so far as to say that "no bank is too big to indict," a nuanced reversal to his statements from last March.

Holder plans to use the JPMorgan settlement as a template for the next rounds of lawsuits facing these large institutions.

What this means for bank stocks in 2014
Last year was a very good one for bank stocks. Goldman led the charge, rising nearly 35% for the year, while Bank of America and JPMorgan were both up about 30%. Even Citigroup rose 26%. 

BAC Chart

The question then becomes: Has the market priced in multibillion-dollar settlements for these other megabanks, or will Holder and the Justice Department rain on this bank bull market's parade?

So far in 2014, these stocks have performed on par or better than the S&P 500, which is a positive sign for bank investors. The market has known for some time that the Justice Department is eyeing large fines for the megabanks. JPMorgan has already endured its turn in the spotlight, and its stock managed very well in consideration of the pressure on the company. 

^SPX Chart

It follows, then, that the market is prepared for temporary shocks to these banks' financials and the news frenzy that will follow. As 2014 progresses, the announcements of these fines could be buying opportunities for investors interested in increasing their exposure to the sector.

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