No get-out-of-jail-free cards here, U.S. Attorney Preet Bharara says. Photographer: Scott Eells/Bloomberg

Feds to Wall Street: Nobody's Too Big to Jail

William D. Cohan, a Bloomberg View columnist, is the author of the forthcoming "The Price of Silence: The Duke Lacrosse Scandal, the Power of the Elite and the Corruption of Our Great Universities," as well as "Money and Power: How Goldman Sachs Came to Rule the World" and the New York Times best-sellers "House of Cards" and "The Last Tycoons."
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Preet Bharara's March 31 speech was little noticed outside a small gathering of legal and compliance executives in Manhattan. He delivered it on the day Wall Street and the financial news media were obsessing over the contention in Michael Lewis's latest book that high-frequency traders have "rigged" the stock market.

In the speech, Bharara, the U.S. attorney in Manhattan, gave his usual defense of the Justice Department's strategy of settling cases with the big Wall Street banks instead of seeking criminal indictments.

Yet he also did something much rarer: He challenged the banks and their leaders to stop whining, fix their cultures, and begin a much-needed overhaul of how bankers, traders and executives get paid on Wall Street.

Bharara, a prosecutor who seems tailor-made for higher political office, has given many speeches since he took the job in 2010. In them, he usually extols his office's enviable record of winning insider-trading cases -- 80 and counting -- and deflects criticism for failing to prosecute senior Wall Street bankers for their roles in the financial crisis.

His explanation for the dearth of prosecutions usually takes the form of: It's not for a lack of trying but rather because of a lack of convincing evidence, which, by the way, we have seen and you have not. So trust us to do the right thing.

He did a little of that old song-and-dance at last week's Securities Industry and Financial Markets Association forum: "Anyone who blithely opines that there is no deterrent -- or other -- value in holding institutions, as well as individuals, accountable is just plain wrong and may not fully understand how the world works. It makes a difference, and we have seen it make a difference."

For the first time, however, Bharara also said that, in the aftermath of the 2002 indictment of Enron Corp.'s accounting firm, Arthur Andersen (which put the firm out of business), "the pendulum has swung too far" away from corporate indictments "and needs to swing back a bit." He predicted, tantalizingly, that soon enough, a "significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it."

Although Bharara did not elaborate on the institution or the timing, his threat sounded pretty ominous. He further elaborated on his belief that no Wall Street bank is "too big to jail," a claim for which Justice Department officials have been roundly criticized. "No one should receive a get-out-of-jail-free card based on size," Bharara continued. "There may be, at the end of the day, extremely compelling reasons why for the sake of innocent third parties a disposition short of a criminal charge is appropriate in some particular case, but there should never be a presumption of immunity based on size. That is a dangerous thing. We should not be adding a presumption of prosecutorial immunity to the mix of moral hazards."

He also was pointed in his critique of Wall Street executives and their lawyers, who relentlessly argue that "if we take any criminal action" against their banks, "the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end."

The banks also have told Bharara that the stigma and reputational damage from any criminal action will "be too much to bear," causing a bank's stock to plummet, clients to flee, key employees to quit and senior executives to wonder if they possibly can go on under such dire circumstances. "They make these claims, of course, without an explanation for why the possibility of such potential had not led them to take compliance more seriously in the first place," he said. "And that is duly noted, believe me."

Then he made a thinly veiled jab at JPMorgan Chase & Co., its chief executive officer, Jamie Dimon, and the bank's recent $13 billion settlement of mortgage-fraud charges: "In fact, sometimes the sky brightens: stock prices remain steady, or go up, as the company is viewed as putting problems 'behind it'; clients and customers and key employees don't even bat an eye; and sometimes, the CEO even gets a raise. And so, this repeated Chicken Little routine, I will tell you, begins to wear thin."

That kind of straight talk is very refreshing. But what made Bharara's speech especially noteworthy was his absolutely correct claim that what is most needed to usher in an era of "new and meaningful change" on Wall Street is nothing less than "an overhaul of the culture."

And then he picked up on a theme I have been pushing for years: that until there are material changes to what people on Wall Street get paid to do every day, you can forget about meaningful reform of the financial system. "If people are rewarded -- and rewarded handsomely -- for making money, and punished, often swiftly, for losing money, then people will do everything in their power to make money, and not lose money," Bharara said. "On the other hand, if compliance failures are tolerated year after year and are viewed simply as a cost of doing business, then compliance failures will just as surely pervade and persist. This is not rocket science. It is simple common sense."

Yes, it is, Lloyd, Jamie, James, Michael and Brian (the CEOs, respectively, of Goldman Sachs Group Inc., JPMorgan, Morgan Stanley, Citigroup Inc. and Bank of America Corp.). And the sooner you guys get with the program and reward prudent risk taking as much as you do revenue generation, the safer and more secure our nation will be.

(William D. Cohan, author of "The Price of Silence: The Duke Lacrosse Scandal, the Power of the Elite, and the Corruption of Our Great Universities," is a Bloomberg View columnist. He was an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. He is now involved in litigation with JPMorgan.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Paula Dwyer at