With the recent admission of criminal guilt by five major banks in fixing foreign exchange rates, Attorney General Loretta Lynch recorded some progress in how law enforcers respond to Wall Street misconduct. JPMorgan, Citigroup, RBS, Barclays and UBS admit they conspired to violate the Sherman Antitrust Act in fixing foreign exchange rates. These judicial actions accord with legal procedure. A federal court and judge will rule on them. They are not backroom deals dressed up in the term “deferred prosecution agreement” (DPA), which has been the unfortunate norm until now. Ideally, the Department of Justice (DOJ) will no longer use these DPAs.
Even with Lynch’s judicial progress, however, she can hardly claim that she has proven that no bank is “too big to jail.” These banks are not in “jail” in any sense of the word. Business continues, even at their foreign exchange desks. The collective $6 billion in criminal and regulatory fines meted out against the five banks are paid by shareholders, not the responsible bankers or their supervisors. And worse, the message remains: Cheating pays and otherwise honest bankers must either cheat to compete, or lose. As one of the foreign exchange traders encouraged a fellow conspirator, “If you ain’t cheating, you ain’t trying.”
As for progress, let us hope that these foreign exchange criminal pleas signal the burial of the DPA.
Until now, the DOJ settled fraud claims against major U.S. banks with DPAs. The misconduct included the mortgage fraud associated with the financial crash and recession that left millions without their jobs, homes and life savings. A DPA is a private agreement between the DOJ and the bank in which the government describes the criminal activity, exacts a fine and then agrees not to bring this case to court for a period of time, such as five years.
Why such a light touch? Why a DPA?
The real reason may be that the DOJ reckoned that a DPA is a better bet. After all, in such major cases against a giant bank, government attorneys will square off against a phalanx of high‐powered, high‐paid bank lawyers, many of whom were recently their bosses at the DOJ. The case will take tie up time, money and personnel. And at the end, the DOJ may well lose. A DPA is much easier. The bankers themselves conduct much of the investigation. Then, the DOJ can stage a press conference. It may not be a guilty verdict, but it’s a kind of win for the DOJ.
It’s also unfortunately a win for the executives. As U.S. District Judge Jed Rakoff explained, “You [the prosecutor] are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.”
Justice is supposed to be blind to such factors as complexity and good lawyers. So the official reason for the DPA is that it reduces collateral consequences. On March 6, 2013, then‐Attorney General Eric Holder used a variation of this official reason when he justified one DPA with HSBC, which involved money laundering for terrorists, tyrants and narco‐traffickers. Rephrased by critics, Holder said that the bank was “too big to jail.”
As it happens, Lynch, when she was U.S. attorney for the Eastern District of New York, signed that DPA with HSBC. At her confirmation hearings to succeed Holder as attorney general, senators challenged Lynch about this settlement. How did Lynch calculate collateral consequences of a criminal indictment given the size of HSBC? Lynch responded that her office did communicate with bank regulators, but they did not “provide any substantive opinions on the potential economic consequences of a criminal charge.”
It’s difficult to believe that bank regulators appropriately concerned about financial sector tranquility didn’t offer an opinion on the economic consequences. But if they did not, that’s troubling, too. If Holder confided that criminal convictions of large banks could have a negative impact on the national economy, how did he figure that? Was it simply a guess?
The criminal pleas by the five major banks, ideally, will serve as the burial of the DPA.
From high altitude, however, Lynch’s judicial progress in securing criminal guilty pleas does little to address the larger problem of deterring misconduct on Wall Street at the largest firms. Your authors, one a libertarian, the other a progressive — unlikely allies — believe that size must be no insulation from real legal responsibility. While we recognize that prosecutors may face difficult decisions when they discover criminal activity at large financial institutions, their prosecutorial discretion, at the very least, must be informed. They should learn from financial regulators and independent experts about any collateral consequences from prosecutorial decisions. And if the DOJ announces a DPA or a criminal plea for a mega‐bank, it should transparently report the results of those discussions so that we can understand how the information obtained may have mitigated the settlement.
In addition, we believe that where the DOJ alleges a crime, it must target the responsible bankers. Banks can’t be put in jail, but bankers can be. As with a DPA, these criminal pleas are a way for the banks to use shareholder money to avoid a noisy trial where a trader might finger a supervisor. Forcing the innocent —the shareholders — to bear the punishment for a crime cannot serve as a deterrent for criminal bankers. In fact, it sends the opposite message. It sends the message that honest bankers will lose out to the dishonest bankers. It sends the message that “If you ain’t cheating, you ain’t trying.”