“Even if you don’t have the authorities—and frankly I didn’t have the authorities for anything—if you take charge people will follow.”  So said Treasury Secretary Henry M. Paulson, Jr., former CEO of Goldman Sachs, to the Washington Post on November 19, 2008, just about two months after TARP (the Troubled Asset Relief Program) passed through Congress.  The Treasury Department, for example, guaranteed one trillion dollars’ worth of money-market funds without legal authority.  Secretary Paulson said he hated to bail out banks—it was against his philosophy—but he had to do it.  Famously, the banks were considered Too Big to Fail.  Paulson committed, according to Bloomberg, $13 trillion to bail out the banks and others.

TARP remains the most despised act in the history of Congress.  The public resents the fact that slack government regulators allowed the bankers’ greed to create the crisis in the first place, then put in place a feeble recovery without establishing any plausible safeguards to protect them from the bankers’ bad behavior bringing on another collapse.  The Too Big to Fail banks are bigger than they were before the bailouts.

Secretary Paulson’s lawlessness established the basic operating principle of the Fiscal Crisis, which continues today.  Both the Bush and Obama administrations claim that their massive intervention saved the world from a full-on global depression.  Saving the world is what justified the lawlessness.

What about those who caused the crash?  The Fiscal Crisis, after all, was not an event of nature, like a volcano or tsunami.  It was caused by greedy, reckless individuals.  Couldn’t we at least make an effort to restore the rule of law by holding those individuals accountable?  No, the Bush and Obama administrations decided the bankers were Too Big to Jail.  Indeed, no one has gone to jail.  The government has not even tried to send anyone to jail.  How can we possibly change the banks’ culture if no individuals are punished?  Sine the banks have merely been fined for bad behavior, won’t they simply chalk that up as a cost of doing business, much like a parking ticket?

We started to find out, in late 2012 and early 2013, why the Department of Justice has done nothing.  Deputy Attorney General Lanny Breuer was asked why no one had been jailed; he said he hadn’t found any crime.  First, he said he had tried hard to find one but couldn’t.  Then, he said—and here was the surprise—that if he had found one it wouldn’t matter.  He couldn’t indict because the banks were Too Big to Fail, and that meant that those who run them are Too Big to Jail.

What does it mean to be Too Big to Jail, and where did this idea come from?  And, basically, once you have said it, is there anything left to say?

Speaking to the New York City Bar Association on September 13, 2012, Breuer said,

In my conference room over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects.


Sometimes—though, let me stress, not always—these presentations are compelling.  In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct.

The DOJ noted that it had indicted Arthur Andersen in 2002 for its misconduct with Enron, and the firm disappeared.  The department explained it now believes the collateral damage was too great.  Of course, the Arthur Andersen employees did not disappear: They were hired by other firms.  Enforcement of the law does have consequences.

In December 2012 the New York Times reported that federal authorities decided against indicting HSBC, a large British bank doing business here, in a money-laundering case over concerns that “criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.”  The bank had facilitated money-laundering by Mexican drug cartels and had moved tainted money for Saudi banks tied to terrorist groups.  HSBC paid $1.92 billion to settle charges.  Lanny Breuer, at a press conference explaining the HSBC settlement, explained that,

Had the U.S. authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized.  Our goal here is not to destroy a major financial institution.

Around the same time, Standard Chartered, another British bank, paid $327 million to settle charges for making transactions for Iranian and Sudanese clients through its U.S. subsidiaries.  (To avoid Treasury Department filters, Standard removed names and other identifying information.)  Justice didn’t try to put anyone in jail or even get an admission of wrongdoing.

In 2009, Sen. Ted Kaufman (D-DE) asked Lanny Breuer, “Why aren’t we seeing more boardroom prosecutions?”  Breuer replied, “We’re bringing the cases but it will take a long time.  But they will be brought.”  Four years later, Frontline asked Breuer, since “there have been no such prosecutions,” what happened?  Breuer replied, “What I meant by it is it takes a long time to investigate these kinds of cases.  And I don’t accept your premise that they haven’t been brought.  I think it’s a matter of definition.”  Frontline followed up: “The public thinks Wall Street’s getting a pass.”  Breuer answered, “We are holding people to account, but in holding them to account, it cannot always be a criminal case.”

“I think I am pursuing justice,” Breuer insisted, when he was asked, in view of his New York City Bar Association talk, whether a prosecutor should do anything else but “simply pursue justice.”  Breuer continued,

And I think the whole entire responsibility of the department is to pursue justice.  But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect, it affects the economy so that employees who had nothing to do with the wrongdoing [are hurt].

The DOJ’s “innocent employees” test is odd since employees, except in the case of the Mafia, are almost always innocent.  What we need to know is who, specifically, is Too Big to Jail?  What standards make them so?  And who, exactly, decides that they are?

In early March of this year, Breuer’s boss, Attorney General Eric Holder, told a Senate committee that he was concerned that “some of these institutions have become too large”:

I am concerned that the size of some of these institutions becomes so large that it does become difficult to prosecute them.  When we are hit with indications that if you do prosecute—if you 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.

Our banks, with no fear of jail, view government fines as a small price to pay for reckless and profitable behavior.  The government, as noted above, has not even insisted on a concession of wrongdoing.

Examples of this quid pro quo abound, and the sum of them is staggering: In January 2009 Lloyds TSB Bank settled (to the tune of $350 million) DOJ charges that it falsified wire transfers by “stripping” the identities of customers in countries (like Iran) under U.S. sanctions from the financial transactions, subsequently providing these customers with illegal access to the U.S. financial market.  Then, in February 2009, UBS paid $780 million to settle DOJ charges that it helped its clients avoid taxes.  And in December of that year Credit Suisse AG settled ($536 million) with the DOJ for illegally conducting transactions with customers from Iran and Sudan.

In February 2010 State Street settled ($300 million) SEC charges that it misled investors by understating the bank’s exposure to subprime mortgages.  In May of that year ABN AMRO Bank settled DOJ charges by paying a fine ($500 million) for sustaining a complex operation to circumvent the laws of the United States by conducting business with countries under sanctions.  In July 2010 Goldman Sachs settled ($550 million) SEC charges that it structured and marketed a synthetic CDO without disclosing that a major hedge fund not only had participated in the selection of the mortgages but had bet against those mortgages.  In August of that year Barclays settled ($298 million) Justice Department charges of “knowingly and willfully” moving millions of dollars through the U.S. financial system from Cuban, Iranian, Libyan, Sudanese, and Burmese banks.  And in December 2010 Deutsche Bank paid a fine ($553.6 million) for criminal involvement in financial transactions that evaded the IRS by setting up “fraudulent tax shelters” for wealthy U.S. citizens.

In April 2011 JPMorgan was fined $56 million for wrongfully overcharging and foreclosing on mortgages to active-duty military personnel.  Then in June 2011 JPMorgan settled ($153.6 million) an SEC complaint alleging the bank failed to disclose to investors that a hedge fund assisted in picking the debt for a CDO and then bet against that same debt.  In July of that year JPMorgan settled ($228 million) federal and state charges that it rigged the bidding process of 93 investment transactions affecting 31 state governments.  In August 2011 JP Morgan settled ($88.3 million) charges that it “egregiously” violated U.S. sanctions by processing certain wire transfers.  In October of that year Citigroup settled ($285 million) charges that it sold risky CDO packages to investors without disclosing that it bet against those same packages.  And in November 2011 Bank of America settled ($410 million) a class-action lawsuit alleging that it processed debit-card transactions from the highest dollar amount to the lowest dollar amount as a means to maximize overdraft charges.

In February 2012 JPMorgan and four other banks settled ($26 billion) federal and state charges of engaging in shoddy loan servicing, illegal robo-signing, and faulty foreclosure processes.  Also that month, JPMorgan and Bank of America settled ($110 million) litigation alleging the banks manipulated the order in which they processed checks in order to charge unwarranted overdraft fees.  In March 2012 JPMorgan settled ($150 million) civil suits claiming that it had invested pension funds in risky investments that failed in 2008.  In June of that year Barclays settled ($450 million) charges from U.S. and British agencies for attempting to manipulate LIBOR, which affects trillions of dollars in loans.  In November 2012 JPMorgan settled ($296.9 million) an SEC suit alleging that it misled investors by failing to disclose accurate delinquency rates of certain mortgages that made up some of the mortgage-backed securities it sold.  That same month Credit Suisse settled ($120 million) SEC charges that it misled investors purchasing its risky mortgage-backed securities.  In December 2012 HSBC settled ($1.92 billion) charges that it had laundered money for Mexican drug cartels and assisted Saudi banks that were aiding terrorists by failing to exercise adequate control over its global financial transactions.  Also that December, UBS settled ($700 million) charges that it manipulated the Yen LIBOR to benefit its own derivative bets.  And finally that month, Standard Chartered paid $322 million for the charge of falsifying documents to avoid sanctions on dealing with Iranians and Sudanese.

Now we come to the current calendar year.

In January JPMorgan and nine other banks reached a settlement ($8.5 billion) with federal regulators regarding multiple abuses of the foreclosure process.  In March JPMorgan agreed to return cash ($546 million) to former customers of MF Global Holdings for its connection with MF Global’s misuse of customer funds.  In July Barclays paid a fine of $435 million after the Federal Energy Regulatory Commission (FERC) found that the bank had manipulated the price of electricity in order to reap vast economic gain from its commodities trade.  In July UBS settled a suit ($885 million) for selling toxic mortgages to Fannie Mae and Freddie Mac.  In August a preliminary civil settlement ($8.5 billion) against Bank of America was reached for the sale of fraudulent mortgage securities to investors.  In August UBS settled ($50 million) SEC charges that it withheld upfront CDS payments without attaching them to the appropriate CDO package.  That same month JPMorgan paid fines totaling $410 million after FERC found that the bank devised “manipulative schemes” to transform “money-losing power plants into powerful profit centers.”  On August 6, JPMorgan announced that it faced a criminal and civil investigation for the sale of subprime mortgage-backed securities in 2005-07.  Also that day, the DOJ sued Bank of America, accusing the bank of defrauding investors by understating the risks of mortgages backing $550 million in securities.  In September JPMorgan agreed to pay $920 million to a host of governmental agencies in connection with the $6 billion London Whale loss.  And the Consumer Financial Protection Bureau announced JPMorgan would pay fines of $80 million and $309 million in restitution for selling credit-card customers bogus services.

All this wrongdoing, and the government made no effort to send anyone to jail.

Finally, in mid-August of this year, the Department of Justice announced it had issued two arrest warrants.  That made for interesting headlines, but the underlying story was not so compelling.  Two former traders at JPMorgan’s London office were charged for their role in the six-billion-dollar London Whale losses.  What was their crime?  Had they defrauded investors by selling them junk?  Or tricked other banks?  No, not at all.  The Whale’s trades were perfectly legal—not clever, but legal.  Their crime was concealing the losses from their bosses, including Jamie Dimon.  It was a crime against JPMorgan.  The London Whale himself, Bruno Iskil, made a deal with the government to be its chief witness against his two former colleagues.  Whether any trial will take place, however, is questionable—one trader had already returned to his native France, and the whereabouts of the other is not known.

The banks have not changed their culture since the Fiscal Crisis started.  Giving out parking tickets to the banks is not taking effective action to change their culture either.  JPMorgan, for example, despite the cost of tickets and the London Whale losses, has announced record quarterly profits.  Also, since there is no admission of wrongdoing, the cost of the tickets is tax deductible, which means that the U.S. taxpayer pays a large piece of it.  The top 1 percent of New York City workers, mostly in the financial-services industry, earns 40 percent of the total of all income earned in the city: The average salary in the securities industry is $362,900.  At Goldman Sachs the average salary—including mail boys—is over $500,000.

Bank salaries, as the U.K. Parliamentary Commission on Banking Standards found, have “incentivised misconduct and excessive risk-taking, reinforcing a culture where poor standards were often considered normal.”  The result has been “a profound loss of trust born of profound lapses in banking standards.”  The banks, the commission found, “have failed in many respects.”  They have failed taxpayers “who had to bail out a number of banks.”  They have failed “many retail customers with widespread product mis-selling.”  They have failed “their own shareholders destroying shareholder value.”  Finally, they have failed “in their basic function to finance economic growth, with businesses unable to obtain the loans that they need at an acceptable price.”  The restoration of trust in banking is essential not just for the banks “but for the industry to better [sic] serve the needs of the real economy” and to contribute effectively to the country’s role as a global financial center.

Individual responsibility, especially at the most senior levels, has to be established.  The banks typically organized themselves to give deniability to officers at the highest level.  Where the senior executives “could not claim ignorance they fell back on the claim that everyone was party to a decision so that no individual could be held squarely to blame—the Murder on the Orient Express defence.”

Members of the public “are angry that senior executives have managed to evade responsibility.”  The

distorted incentives are nowhere more apparent than in the asymmetry between the rewards for short-term success and costs of long term failure for individuals.  Many bankers are taking part in a one-way bet, where they either won a huge amount, or they won slightly less and taxpayers and others picked up the tab . . .

The commission recommends that licensing be required for all banking employees “whose actions or behavior could seriously harm the bank, its reputation or its customers.”  Bad behavior would lead to a revocation of the employee’s operating license.  Ultimately, the commission concluded, “unless the implicit taxpayer guarantee is explicitly removed, the task of improving banking standards and culture will be immeasurably harder.”  The “incentives for banks to become and remain too big and complex are largely still in place.”

The U.S. government’s solution to Too Big to Jail is the 3,200-page Dodd-Frank Act.  Its premise is that more and better regulations will solve the problem.  The written regulations to date (155 of 400 proposed) have added 14,000 more pages.  When President Obama signed Dodd-Frank he said, “the American people will never again be asked to foot the bill for Wall Street’s mistakes.  There will be no more taxpayer funded bailouts.  Period.”  The Parliamentary Commission takes a more skeptical view:

That regulation is well intentioned is no guarantee that it is a force for good.  Misconceived and poorly-targeted regulation has been a major contributory factor across the full range of banking standards failings.  Regulators cannot always be expected to behave as disinterested guardians who will pursue the “right” approach. . . . Regulators were complicit in banks outsourcing responsibility for compliance to them by accepting narrow conformity to rules as evidence of prudent conduct.  Such an approach is easily gamed by banks . . .

“Banking history,” the Parliamentary Commission writes,

is littered with examples of manipulative conduct driven by misaligned incentives, of banking failures born of reckless, hubristic expansion and of unsustainable asset price bubbles cheered on by a consensus of self-interest or self-delusion.  An important lesson of history is that bankers, regulators and politicians alike repeatedly fail to learn the lessons of history: this time, they say, it is different.