Attorney General Eric Holder made it official in testimony before the Senate Judiciary Committee: Some banks are so big that criminal prosecution poses an unacceptable danger to the U.S. and world economies. This is not Holder's opinion alone. In the past, the Justice Department has consulted with the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to assess the consequences of criminal prosecution. This is a government-wide problem.
This means that if a bank is large enough it has a license to engage in criminal conduct. At least it can weigh the upside of the criminal behavior against potential civil penalties. The authorities are powerless to compel compliance beyond this. We have institutionalized that crime pays.
Early action might catch bad behavior. But the regulators are not very adept in that area either. The Permanent Subcommittee on Investigation report on the HSBC hearings last summer catalogue more than 45 warning letters from the Comptroller citing behavior that was incontrovertibly money laundering for rogue states and drug cartels. Nonetheless, HSBC kept laundering for years.
Fed Governor Bloom Raskin, a sensible regulator, recently called on the banks to be more concerned about reputational risk. History suggests that this will not be an effective deterrent.
The inability to prosecute criminal behavior, in effect repealing the rule of law, is really an extension of the fundamental decision to bail out the banks seeking nothing of consequence in return. When Treasury dumped hundreds of billions of TARP money into the big banks, we were told they were healthy and viable, needing cash only to restore confidence. The government became a partner of the banks, obfuscating the untruth of that endorsement. Out of fear or bias or both, we adopted a policy that the system should be preserved at all cost. It was decided that the public couldn't handle the truth.
It is unconscionable that our prisons are filled with young people, sentenced under draconian guidelines for drug offenses while prosecutors claim powerlessness against banks that still pay absurd bonuses from mind boggling profits. We are a society that can dole out punishment worthy of the Old Testament so long as the privileged and powerless are excluded.
Break up the banks, prosecute individuals, or concoct severe penalties that don't threaten bank licenses. Or do it all. The government owes it to the public, including the young people behind bars and their families.
About Wallace Turbeville Senior Fellow at Demos
Hester Peirce Senior Research Fellow at the Mercatus Center