The US Government Has Finally Begun Going After Banks, But Their Names Will Surprise You

The US wants Credit Suisse (NYSE: CS  ) to plead guilty to charges of helping Americans avoid taxes through the use of Swiss bank accounts. More recently, reports arose that a deal involving a guilty plea and an over $1 billion settlement are close at hand.

Separately, BNP Paribas could also be looking at criminal charges and fines of over $2 billion for conducting business with countries sanctioned by US law, including South Sudan.

After everything that happened during the financial crisis, I have to admit I read about these potential prosecutions with a degree puzzlement. Why only two foreign banks? Why now? 

What about that whole financial crisis thing? 

The Difficulty of Bank Prosecution

Source: US Department of Justice.

It turns out that prosecuting banks for wrongdoing isn't as simple as it looks. Last year, Eric Holder, the US Attorney General, famously let slip a few words about bank prosecution that raised some eyebrows (he later said his words were misconstrued): 

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... I think that is a function of the fact that some of these institutions have become too large. 

Does that mean we haven't seen any financial crisis prosecutions because banks are simply too big to jail?

It certainly looks a little odd that there has been such brisk business in settlements without any major prosecutions. And it looks a little odder still that the first ones we're hearing about involve Credit Suisse and BNP Paribas, two foreign banks, on charges unrelated to the events that brought the economy to its knees. 

But perhaps there are other subtleties at work. As Jed S. Raskoff, a United States District Judge for the Southern District of New York, points out, there isn't just one simple answer. 

The US government, he argues, was instrumental in laying the groundwork for many of the incentives that led up to the financial crisis. Afterwards, regulators were grappling both with budget cuts and with delivering on other areas of prosecution, like Ponzi schemes and insider trading). Both factors detracted from their ability to conduct the plodding, long-term work that would be required to bring complex financial fraud cases into the courtroom. 

Judge Raskoff argues that building a case against either an individual or a bank takes time, effort, and expertise -- all of which appear to have been sorely lacking when needed most. 

Source: Credit Suisse.

Enter Credit Suisse
So, perhaps we're seeing the government taking Credit Suisse and BNP Paribas to task because both cases happen to avoid those particular pitfalls. Tax evasion and illicit transactions are probably much simpler to deal with than securitized financial products, and neither bank could be described as "too big to jail" from an American economic point of view. 

And of course, the US government had nothing to do with creating the conditions for illegal transacting or tax fraud (though there is definitely a joke about taxes in here somewhere).

I suppose it makes sense that prosecutors would take the low-hanging fruit where they can, and I applaud US prosecutors for upholding the law. It just disappoints me that we have been so content with taking fines and avoiding the word "guilty" in those other, rather glaring areas.

If this is a victory for American justice with regards to the banking sector, it still feels like a hollow one. 

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