Breaking bad? Too-big-to-fail banks not guilty as not charged.

• Author: Packin, Nizan Geslevich

Since the 2008 financial crisis, rating agencies, (1) regulators, (2) global organizations, (3) and academics (4) have argued that large banks receive significant competitive advantages because the market still perceives them as likely to be saved in a future financial crisis. (5) Therefore, not only do the largest banks enjoy the economic safety benefits of being large and diversified, but they also receive implicit as well as explicit and direct government subsidies. (6) The most significant subsidy, an implicit one, stems from market perception that the government will not allow the largest banks to fail--i.e., that they are "too-big-to-fail" ("TBTF") (7)--enabling them to borrow at lower interest rates. (8) Focusing on these subsidies, recent media reports sent shockwaves across financial markets by estimating the value of the financial advantages for the six largest U.S. banks since the start of 2009 at $102 billion. (9) On November 14, 2013, the Government Accounting Office ("GAO") issued the first of two reports on the benefits large banks receive because of their size. (10) A less obvious yet highly-related issue is large banks' exemptions from criminal statutes. This issue was not mentioned in the 2013 report, but should be included in the 2014 report that will examine the economic advantages the largest banks receive because of implied government support. Specifically, in this Commentary, I argue that this exemption contributes to the subsidies' economic value while also creating incentives for unethical and even criminal activity.

Before analyzing the elements of such exemptions, it is critical to first understand large banks' subsidies framework in which such a benefit exists. The 2013 report was the result of a highly controversial debate on the existence and nature of such subsidies, especially following the enactment of the Dodd-Frank Act, (11) but there is still disagreement as to whether large banks actually receive any subsidies. (12) Certain commentators argue that large banks deserve different treatment because they create benefits for businesses that would not be available elsewhere; (13) the banking field facilitates substantial scale economies, (14) which make large banks a source of gains for society (15) that justify Congress's support. Therefore, they essentially argued that the largest banks are unique and worth protecting because they leverage revenue and cost synergies through economies of scale, and as a result create benefits, that pass on to their customers and investors and lower the costs of finance for the entire society. (16)

One of the benefits large banks receive is a non-monetary semi-exemption from criminal statutes that contributes to their subsidies value. Indeed, the Department of Justice ("DOJ") allows for "deferred prosecution" and advances settlements instead of criminal charges for large financial institutions when they violate criminal laws such as money laundering and drug trafficking. (17) This semi-immunity policy, nicknamed "too-big-to-jail," (18) also translates into an additional economic advantage that only the largest banks enjoy. (19)

TOO-BIG-TO-JAIL

In the years following the financial crisis, the media reported on large-scaled scandals in which the biggest banks were illegally involved. Nevertheless, even after it had learned about these scandals, the U.S. government only fined rather than prosecuted the relevant banks. This approach, which was nicknamed too-big-to-jail, caused a great deal of anger and frustration. (20) Trying to justify this policy, Attorney General Holder explained that the DOJ cannot indict big financial institutions because doing so might harm the economy. Holder, testifying before the Senate Judiciary Committee, said that he is "concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute--if we do bring a criminal charge--it will have a negative impact on the national economy, perhaps even the world economy." (21) Some have argued that this declaration is unsurprising given that in 1999, as Deputy Attorney General, Holder instructed prosecutors to consider "collateral consequences" when determining whether or not to prosecute corporations. (22)

This statement also makes sense given the current reality, in which the U.S. government preferred, instead of prosecution, (23) a $13 billion settlement in November 2013 with JPMorgan for its role in creating the 2008 crisis. (24) One of the reasons for doing so is that whatever acts JPMorgan had allegedly done were of such magnitude that prosecution through the judicial system would have prolonged the proceedings not just over years, but possibly over generations. Thus, prosecuting JPMorgan appears to have been unrealistic and out of the question. JPMorgan was allowed to become too-big-to-jail, and now it is out of the reach of any government, even if such benefits offend the public's sense of justice. And while the DOJ declared that it "does not release individuals from civil charges, nor does it release JPMorgan or any individuals from potential criminal prosecution," (25) this statement does not mean much. According to certain studies, major banks normally do not get prosecuted, and banks that do typically receive deferred or non-prosecution agreements, which are settlements that avoid indictment or convictions. (26) Similarly, individuals are also rarely prosecuted, and that helps the firm avoid criminal convictions as well. (27) They believe that this is the result of the government not wanting the major banks to lose their banking licenses, or to hurt their reputation and consequently innocent shareholders. (28)

IF YOU BUILD IT, THEY WILL COME

Letting JPMorgan and other large banks dodge criminal liability has several negative effects. First, it "effectively vitiates the law as written by Congress," (29) as Congress had no intentions to declare that violations of money laundering, terrorist financing, or fraud would only constitute civil violations.

Second, giving the large banks de facto special treatment conflicts with the basic constitutional provision of equality under the...