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. 

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2947929, ~/Articles/ArticleHandler.aspx, 9/5/2015 8:20:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Anna Wroblewska

Anna began her career in finance as a college intern at a hedge fund, and she hasn’t been able to escape its siren song ever since. She’s done academic research at Harvard Business School and UCLA, was the COO of a wealth management firm, and now writes about finance, economics, behavior, and business.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:01 PM
CS $25.72 Down -0.53 -2.02%
Credit Suisse Grou… CAPS Rating: ***