Would a Criminal Indictment Kill a Bank?

Credit Suisse headquarters in Zurich Photograph by Gianluca Colla/Bloomberg

Preet Bharara, U.S. Attorney for the Southern District of New York, and other prosecutors intent on punishing banks for criminal behavior are facing a difficult question: Would charging one of them put it out of business?

After suffering a torrent of criticism for the lack of prosecutions against large banks and bankers for their role in precipitating the financial crisis—the latest of which comes in the form of this compelling story by Jesse Eisinger in the New York Times Magazine—Bharara and others in law enforcement are trying to figure out what the consequences of a criminal case against a major financial institution would be. And, like all things that live within the murky intersection of business and politics, it isn’t as straightforward as some might like.

“You can’t do a guilty plea of a systemically important financial institution without first getting the regulators on board a commitment that the conviction won’t put the bank out of business,” Samuel Buell, a former Enron prosecutor who teaches at the Duke University School of Law, told Bloomberg News. “That seems to be going on here, not surprisingly.”

If prosecutors charge Credit Suisse and BNP Paribas, two foreign banks the government is said to be looking at closely, there are concerns that either could lose its license, which would force it to stop doing business. Even the possibility of a review could scare other institutions and prevent them from interacting with the bank, which could push it into a liquidity death spiral. Meanwhile, the precedents of Arthur Andersen, the giant accounting firm that folded after it was convicted in 2002 of obstructing the Enron investigation, costing thousands of innocent Andersen workers their jobs, and Lehman Brothers, the collapse of which had vast, unpleasant, consequences, are weighing heavily on prosecutors’ minds.

Of course, none of this proved to be the case with SAC Capital, Steven Cohen’s hedge fund now known as Point72 Asset Management, a family office. SAC was indicted by Bharara’s office in July, pled guilty to the charges, and agreed to pay a $1.2 billion fine. Contrary to expectations, that didn’t curb the desire of many investment banks to trade or extend credit to Cohen’s company. Goldman Sachs Chief Executive Officer Lloyd Blankfein appeared on CNBC in September to explain his firm’s decision to continue doing business with a fund described by Bharara as a “magnet for market cheaters:”

“We are a big liquidity provider, we’re a major prime broker. That would be quite an existential decision for them if all the liquidity providers withdrew liquidity on the basis of an indictment which they’re contesting,” Blankfein said. “The government wouldn’t want us to withdraw that, because if everybody withdrew liquidity, you would vaporize a firm.”

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