Are Banks Too Big To Prosecute?

Moneybox
A blog about business and economics.
Jan. 30 2013 12:38 PM

Are Banks Too Big To Prosecute?

The Jan. 22 Frontline episode The Untouchables" has reignited the debate over why no major financial institution or bank CEO was prosecuted in the wake of the 2007-2008 financial crisis. U.S. Sens. Sherrod Brown and Chuck Grassley sent a letter yesterday to the Department of Justice that, I think, puts this the right way. Did the Obama administration make a determination that some institutions were, in essence, "too big to prosecute"?

This is a great question and I think it'd be a great subject for the Judiciary Committee to hold some hearings on. My frustration with the way the issue is portrayed on Frontline and on blogs, however, is that nobody seems to be taking the question seriously enough. The official line from the Justice Department, of course, is that nothing of the sort was happening. Criminal prosecutions weren't brought because the evidence wasn't there. Or maybe it's because the decision was made, individually, by dozens of different U.S. attorneys all across the country simultaneously. That doesn't sound very plausible, and so the pushback has all focused on the fact that it doesn't sound very plausible. So in response to DOJ exaggerations about the difficulty of prosecution, we're now getting populist exaggerations about the ease of prosecution. But lots of things are hard. Organized crime prosecutions aren't easy, that doesn't mean the DOJ doesn't do them. It means federal prosecutors need to be good at their jobs. And it's pretty clear that a policy decision was made to not try hard in this case.

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So the populists win that round. But I think that returns us to the real policy question. Would prosecution of major banks have been a good idea? Luigi Zingales is mighty breezy on this subject.

Here's the counterpoint. When I first moved to D.C., I opened an account at Riggs Bank since Riggs was close to my house. The next year, Riggs ended up in tons of legal trouble since it turned out to have been complicit in a lot of illegal money laundering. That's shifting frozen funds to indicted war criminal Augusto Pinochet, helping the dictator of Equatorial Guinea conceal funds stolen from his population, and the financing of al-Qaida terrorists. Serious stuff. Serious investigation. Serious penalties. The upshot was to make the bank nonviable, and it got taken over by PNC Bank out of Pittsburgh. A midsized regional bank facing prosecution and being taken over by a larger regional bank from a geographically adjacent region is bank regulation as it's supposed to be done. But what if the DOJ had prosecuted Bank of America or Citigroup into nonviability in 2009? Who was going to buy them? Nobody! That was the whole point of TARP and all the rest.

Had you secured criminal convictions against these megabanks, you'd have had to nationalize them and assume their liabilities or else face an economic catastrophe. But if the Obama administration wanted to nationalize the banks, it could have secured that outcome without the bother of criminal prosecution. They decided nationalization was bad public policy. Others disagree. That was an interesting debate in 2009, and I think it remains an interesting debate today. At the time I was an ardent nationalizer. In retrospect I'm not so sure.

But either way, implementing a non-nationalization approach to bank recapitalization and then prosecuting the banks into a renewed state of insolvency and then nationalizing them would have been nuts. If saving the banks was a mistake, then the error had nothing in particular to do with prosecutions, and if saving the banks was the right thing to do, then curtailing prosecutions was the only way to execute the strategy. But hearings should certainly be held. Officials are going to be reluctant to admit that they let economic policy considerations color their law enforcement decisions, but members of Congress should try to smoke out the truth. One of the main aims of the Dodd-Frank legislation is precisely to avoid this outcome, and people ought to be asked whether we can do things differently in the future.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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