For years, the Obama Administration has been pummeled for failing to
bring criminal charges against a single major Wall Street bank or a
single leading Wall Street banker for what the FBI termed an “epidemic
of fraud” that blew up the entire economy. Investigations revealed the
banks committed routine fraud in peddling mortgage securities they knew
were garbage, trampled basic property laws, laundered money from Iran,
Libya and Mexican drug lords, conspired to game the basic measure of
interest rates and more. Yet, time after time, the Justice Department
and regulatory agencies settled for sweetheart deals, with no admission
of guilt, no banker held accountable, and fines that were the equivalent
in earnings of a speeding ticket to the average family.
Yesterday Attorney General Holder stated openly what was already
apparent. The Justice Department believes that Too Big to Fail Banks
are Too Big to Jail. Criminal indictments against banks or leading
bankers might endanger the economy and thus were too big a risk.
Here’s what Holder said
“I am 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 you do prosecute, if you do bring a
criminal charge, it will have a negative impact on the national economy,
perhaps even the world economy,” he said. “And I think that is a
function of the fact that some of these institutions have become too
large.”
Holder was responding to questions by Republican Senator Charles
Grassley about why the Justice Department brought no criminal charges
against the large British bank HSBC after it admitted laundering money
for parties in Iran, Libya and Mexican drug lords. The Attorney General
acknowledged that the sheer size of the big banks “has an inhibiting
impact on our ability to bring resolutions that I think would be more
appropriate. That is something you (members of Congress) all need to
consider.”
Foam the Runway
Allowing the big banks to operate above the law is at one with the
philosophy that guided both the Bush and the Obama administrations
during the financial collapse. Tim Geithner, former head of the New
York Federal Reserve bank under Bush and Treasury Secretary under Obama,
would preach that
it was necessary to “foam the runway” to protect the banks from total
crackup. That “foam” included literally trillions in the backdoor
bailout of banks organized by the Federal Reserve, abandoning the
underwater homeowners who were victimized by Wall Street’s wilding,
while neutering any regulatory or criminal accountability.
Above the Law
Holder’s outrageous admission means that bankers operate – and know they
operate – above the law. That renders all the argument about
regulations and legal limits risible. Bankers spend tens of millions
lobbying to weaken regulations and starve regulators of authority and
resources. But when the action gets hot, the bubble starts to build,
the music keeps playing, they can trample the laws, mislead the
regulators and defraud their customers, bolstered by the confidence that
the laws will not apply to them.
Holder’s argument, however, is indefensible. There is no reason a bank
with billions of assets could not survive the indictment of its CEO or
CFO. If the Fed and Treasury can “foam the runway” to protect otherwise
insolvent banks from collapse, they surely could insure that a bank
survives while its executives are held personally responsible for their
crimes. Putting a few bankers in jail and holding them personally
accountable for their frauds would do much to bring sobriety back to
Wall Street.
The Campaign for a Fair Settlement, of which the Campaign for America’s
Future is a partner, has called on the president to repudiate Holder’s
statement, and to direct the Justice Department to prosecute those who
violated the law. But Holder’s position forces a bigger issue.
Too Big to Be
So big banks operate above the law. And as the conservative head of the
Dallas Federal Reserve Bank Richard Fischer and many others have argued,
they are not disciplined by the market. They know their losses are
covered, while they pocket their winnings. They have multi-million
dollar personal incentives to leverage up, use other people’s money to
make big bets on high risk operations that offer big rewards. Their
excesses blew up the economy, but they got bailed out and emerged bigger
and more concentrated than ever.
And, of course, since investors know the big banks can’t fail, the big
banks can attract money at much lower rates than smaller banks, a
subsidy worth about $83 billion a year according to recent calculations by Bloomberg News.
Clearly, institutions that are above the law and beyond the discipline
of the market cannot exist in their current form. The Congress has only
two choices. The big banks can be nationalized and treated as public
utilities. The public would pocket their profits and cover their
losses. Or the big banks can be broken up, and be accountable to both
the law and the market.
Senators Sherrod Brown and Jeff Merkley have spearheaded the drive to
break up the big banks. This takes remarkable courage. Brown had to
overcome torrents of big money poured into the effort to defeat him when
he ran for re-election last year.
Now they are gaining unlikely allies. George Will has called on conservatives
to follow Brown to the barricades. Republican Senator David Vitter has
joined in calling for study of the subsidy big banks enjoy. Retired
bankers like John Reed, former president of Citibank have joined with
Dallas Fed President Fischer and others to call for breaking up the
banks.
Can the big banks be held accountable? Wall Street is a leading source
of funds for both parties. The revolving door between Wall Street and
Washington spins no matter what administration is in power. The Obama
administration has opposed every effort to break up the big banks.
Republicans in Congress have shamelessly offered themselves as Wall
Street’s protectors in exchange for campaign money.
But Holder’s admission makes action – however improbable – imperative. A
nation of laws and markets cannot abide huge private financial
institutions that are accountable to neither.
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