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Nobody's Worried About 'Too Big to Jail' Anymore

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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It is a little hard to believe, but it was only a year ago that we were talking about whether a criminal indictment of  a big bank would cause the collapse of that bank, or even of the broader financial system. Here's a paragraph from Bloomberg News, dated last May, that sums up what a lot of people were thinking:

Bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise, the lawyers and bankers said, asking not to be named because they weren’t authorized to talk publicly. Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman Brothers Holdings Inc.’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses. 

But Credit Suisse and BNP Paribas did ultimately plead guilty to criminal conduct, and they seem to be none the worse off for it. And here are two more paragraphs from Bloomberg News, dated Friday:

The U.S. Justice Department is pressing to reach currency-rigging settlements on Wednesday that will include guilty pleas from five banks -- one more than previously reported -- according to two people with knowledge of the situation.

The fifth bank is Zurich-based UBS Group AG, one of the people said, asking not to be identified because the matter hasn’t been made public. The other four -- Citigroup Inc., JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc -- will plead guilty to antitrust charges, people familiar with the matter have previously said.

Throw in Deutsche Bank's Libor guilty plea last month and you've got a pretty good sample of the biggest international banks. If you think twice before entering into billion-dollar transactions with such firms, by my count you'll have to think 16 times before, I mean, you're going to end up doing your billion-dollar transaction with one of them, right? There are still a few big banks without recent criminal convictions that might be able to take your billion-dollar transaction, but the pickings are getting slim.  In the space of just over a year, a criminal conviction has become the norm, not the exception.

Which probably means that it's less scary for banks than it used to be? Not just because the stigma with clients and counterparties seems to be gone, as familiarity has bred a distinct lack of contempt, but also because the official consequences of a criminal conviction are less damaging than everyone thought they would be. In theory, there are lots of collateral penalties for banks convicted of crimes. In practice, if you take those collateral consequences literally, and apply them to every bank, then you mess with the banking system in a way that no regulator really wants. So negotiating a waiver of those consequences is just part of the deal:

Banks entering guilty pleas also need to receive permission from the Securities and Exchange Commission to prevent the criminal cases from triggering penalties that would disqualify them from other businesses, including managing mutual funds.

Bank executives have said guilty pleas could topple their operations if they don’t first receive such waivers.

They can't plead guilty until they know it won't hurt too much.  This is of course controversial. We talked the other day about WKSI waivers, in which the SEC lets banks continue to issue securities quickly even after criminal convictions that theoretically disqualify them from "well-known seasoned issuer" status. SEC Commissioner Kara Stein dissented from Deutsche Bank's waiver, saying that Deutsche's actions were "a complete criminal fraud upon the worldwide marketplace." Same, though, for all the FX-rigging banks. What, is the SEC going to declare that all of the big banks are no longer WKSIs, and all their securities offerings have to go through SEC review? JPMorgan filed 11 prospectuses for securities offerings last Friday, and 18 Thursday, and 16 the day before.  Surely the SEC has better things to do than read all of them.  None of them have anything to do with the FX (or Libor) manipulation, and it's hard to see how investors would be helped by slowing these offerings down. 

But the broader point is that a criminal guilty plea no longer comes with the expectation that it will destroy a bank. Instead it comes with the expectation that the bank's business will continue exactly as usual. A guilty plea is just the particular sort of document that you sign before handing over a big check to the Department of Justice, the way a deferred prosecution agreement used to be, and the way a civil settlement is what you sign before handing over a big check to the SEC. The names change, but the sequence of actions doesn't: You sign the document, you write the check, and then you install a monitor for a while to make sure you stop doing the bad thing that you got caught doing. To be fair, the guilty plea comes with a bit more traipsing around to regulators to make sure that there are no collateral consequences, but that path is pretty clearly blazed by now. 

When we talked about this a year ago, I suggested that the normalization of criminal convictions might reduce prosecutors' and regulators' leverage to get banks to settle: If a criminal indictment is no longer a nuclear weapon, then prosecutors can't threaten it to get the settlements and changes that they want. I have to say that I seem to have been wrong: The FX settlements sound pretty tough, "with units of Citigroup and JPMorgan each expected to pay fines of about $1 billion," on top of the big fines that they already paid to other regulators. Prosecutors and regulators seem to have enough threats in their arsenal even without a criminal indictment being a disaster.  Criminal convictions are becoming routine, but that isn't making big fines any less routine, or harder for regulators to get.

The new foreign-exchange-rigging cases are interesting for another reason. From Bloomberg News again:

Traders used multibank chat rooms to discuss orders and coordinate working together to manipulate the market, and the Justice Department is basing the amount of the fines in large part on traders’ level of activity there, said two people familiar with the situation. One chat room that has been central to investigations, known as the Cartel, included traders from Citigroup, JPMorgan, UBS and Barclays.

When we talked about the Deutsche Bank Libor case, I thought it was kind of lame that Libor-rigging penalties look like they're indexed mostly to a bank's dumb use of e-mail and instant messenger, rather than its actual Libor-rigging culpability. Banks that caused more harm, or made more profits, manipulating Libor aren't punished more harshly; prosecutors seem to have focused less on the banks' manipulation and more on their gloating about it afterwards. 

But the FX cases are, at their core, antitrust conspiracy cases. (Libor was partially about antitrust, though that is much debated, but it was mostly about individual banks' freelance manipulations.) And I guess a decent measure of your level of guilt in an antitrust conspiracy really is how much time you spent conspiring in the antitrust conspiracy chat room. Like, that's pretty much the crime: hanging out and chatting about fixing prices. Especially if you actually name the chat room "the Cartel"! That kind of gives the game away. No wonder the banks are planning to plead guilty. They sure look guilty! Plus, it turns out that pleading guilty isn't that bad.

  1. Delightfully, the un-convicted banks seem to include both Bank of America, with its monstrous hoard of settlements for mortgage misconduct, and Goldman Sachs, which is "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Those are the good banks! (Disclosure: I used to help maintain the blood funnel at Goldman.)

  2. Obviously, most individuals charged with crimes do not have this luxury. I quoted Matt Taibbi in the previous footnote, and here let me recommend his book "The Divide," about how the criminal justice system treats the poor, on the one hand, and the financial industry, on the other. I do not share his desire for the criminal justice system to be much harsher on banks, etc., but he is quite right that the criminal justice system is cruel and arbitrary to the poor, and that the disparity is shocking. For myself, I'd vote for less harshness all around, but obviously others disagree.

  3. I'm just counting FWPs (mostly termsheets) and 424b2s (prospectus supplements, etc.) filed on Edgar over the last three business days.

    Incidentally, I am probably exaggerating the consequences of losing WKSI status; as my former colleague Jonathan Weil once wrote

    One reason I'm baffled by the SEC's eagerness to grant waivers to repeat offenders is that the consequences of denying them don't seem that harsh. In 2011, Citigroup disclosed that it had lost its status as a well-known seasoned issuer after a settlement with the SEC over charges that the bank's disclosures were misleading. For a few years, Citigroup lost its ability to register securities without review by the SEC. Lo and behold, Citigroup somehow managed to survive. And the bank since has had its status restored.

    Still it seems inconvenient -- for the SEC as well as the bank.

  4. That "surely"  might be a little strong. Here's one for "Notes Linked to the J.P. Morgan Efficiente Plus Index Series." There are a lot of gems. 

  5. I mean, refusing to waive the collateral consequences of a conviction might itself be enough of a threat to get banks to settle. There's also some negotiation over which entities plead guilty; keeping bigger entities out of guilty pleas is good for minimizing collateral-consequence risk. 

    More generally, though, the mega-banks are so reliant on regulatory goodwill that the regulators don't need to rely on specific statutory powers to punish them. Everything is a negotiation, in which the only thing the banks really have to offer is money.

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

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Tobin Harshaw at tharshaw@bloomberg.net