Banks Are Too Big to Fail or Jail: Barofsky

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May 8 (Bloomberg) -- Neil Barofsky, partner at Jenner & Block, examines the potential risk to the financial industry of bringing criminal charges against banks and whether or not U.S. banks could be next in line for charges on Bloomberg Television’s “Bloomberg Surveillance.”

Particular case?

The allegations are similar.

We have seen this movie before where we have these investigations, and credit suisse is helping assist in tax evasion, bmp, sanctions violations, and typically what we have seen before with the big banks, there is a deferred prosecution agreement, meaning the bank says i am not going to do this anymore, and they pay a big fine and maybe a monitor gets installed.

Doj suffered a lot of criticism for going after the big banks, particularly after attorney general holder went to congress and said we cannot indict these guys because we might bring down the entire financial system.

We are seeing response to the criticism, and testing the water of a criminal charge potentially against a holding company of these institutions, which would be a major shift.

So we have -- there is a huge cascade effect if you put a criminal charge on a bank.

What would happen?

If there was just a straight criminal charge in the too big to fail banks were treated in any other defendant, they would be charged and potentially lose their charter, potentially triggering a crisis.

What the department is doing is not quite that.

They are not peeling back so-called too big to fail, they are talking to regulators, trying to make sure there is a soft landing.

Making sure regulators will not pull their ticket in limiting the cascading effect.

The bottom line is is is uncharted territory.

Although they might try to put the impact -- i love how you frame that about the criminal charges.

Let me frame this.

Is this republicans or democrats pressuring well-meaning prosecutors in new york, where bozos in washington are pushing the prosecutors to test the envelope just for press conferences and star value at home?

I think pr value has a lot to do with this for sure.

It is written -- it is written in response -- it is in response to prosecutors.

It is not addressing the core part of those complaints, which is big institutions should not be treated differently just because they have a hostagetaking ability to take down the entire economy.

Make it so you can indict one of these organizations without having to do anything special to soften the blow will stop make them so they are not too big to fail, so they can be charged with consequences like a smaller organization.

Go ahead with the criminal charges, which means you might actually pull back -- there is a legal term -- or cancel the charter of the bank.

Other companies would not be able to do business without because they are criminally charged, right?

My view is they are too big to fail and jail.

You cannot do something to these big companies without risking the financial system.

We should recognize that and say to these institutions, you committed a crime and we are not going to do this because we might put the system at risk.

But we are never going to let you do it again.

You will make this argument to us, we will break you up, or you will volunteer to break up so you can never again come to us and say we committed a crime, but you cannot indict us because if you do you have to do the special conditions with regulators and make sure we do not feel the full runt.

-- the full brunt.

Is there one we can use as a test case?

We will see what happens.

If it is not too bad, i would expect that u.s. banks would be next on the docket.

Neil borofsky thanks.

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