WASHINGTON The Department of Justice is ratcheting up pressure on big banks to squash illegal behavior, pushing Credit Suisse to plead guilty to a criminal charge as part of its landmark $2.6 billion settlement over tax fraud charges.
The rare move follows mounting criticism that law enforcement and regulators have been too soft on big banks in the wake of the financial crisis, and that so-called deferred prosecution agreements, used to avoid criminal charges, don't go far enough in deterring institutions from wrongdoing.
Below we offer four key takeaways from the Credit Suisse deal, including what it means for other big banks facing Justice Department scrutiny:
'Too Big to Jail' lives on
Credit Suisse became the largest bank to plead guilty to a U.S. criminal charge in 20 years. The Swiss bank, which operates in the U.S. through branches overseen by the Federal Reserve and state regulators, will also pay $2.6 billion in fines. Attention is now shifting to another foreign bank, BNP Paribas, which could face criminal prosecution related to its financial services relationships with countries under U.S. sanctions.
The Justice Department is likely hopeful that the deals will erase the memory of
But many observers agree the Credit Suisse action failed to resolve the debate. Despite the guilty plea by the bank, and a possible plea for BNP Paribas, the real-world effects on the institutions appear small relative to their total international operations. That distinguishes this action from the last high-profile prosecution of a big U.S. corporation, when charges against the auditing firm Arthur Andersen in the Enron scandal effectively led to the demise of the accounting giant.
Brandon Garrett, a University of Virginia law professor, said Credit Suisse's guilty plea was essentially just another component of its settlement with U.S. authorities, which will allow its U.S. branches to keep operating. He said the lines between such a deal and a deferred prosecution agreement in which a bank faces penalties but no criminal charge are blurred.
"This doesn't mean the end to 'too Big to jail' concerns. This is still an agreement," said Garrett. "A plea bargain is a contract. A company only really gets served if they fight it tooth and nail to a trial, and very few companies have done that since Arthur Andersen."
Many have hailed Credit Suisse's guilty plea as proving that prosecutors can charge a big bank without indirectly hurting the broader economy resulting from financial or regulatory consequences suffered by the firm. At the press conference Monday, Holder said Justice's coordination with the Federal Reserve Board and New York State Department of Financial Services was "imperative" since criminal charges can "trigger serious follow-on actions by regulatory agencies."
But others questioned whether that leaves the guilty party with any real pain.
"This has all been carefully stage-managed to make sure there's no disruption nothing like Arthur Andersen. When you add that up in practical terms, you end up saying, 'What is really different about the outcome compared to the deferred prosecution agreements at HSBC and UBS?'" said Arthur Wilmarth, a law professor at George Washington University. "Have we really seen anything to suggest a fundamental, transformative change in the culture to make sure this sort of thing doesn't continue? I don't see anything different except the symbolic notion that the parent bank pleaded guilty and paid a bigger fine. But it's a difference of degree, not kind."
But prosecutions of other banks are now more likely
Still, some observers credited the Justice Department for taking the step that it did against Credit Suisse, and said the action increases the odds of future large bank prosecutions.
"I've been critical of Holder and DOJ before, but I'm one of those that thinks this is a major step in the right direction," said Lawrence Baxter, a law professor at Duke University.
Experts said the Justice Department's action brought in concert with other regulators gives authorities a model for pursuing prosecution against large banks without causing broader financial harm. That raises the likelihood of the government pursuing criminal charges against other institutions including those based in the U.S. for a variety of alleged offenses.
"I suspect that we will see more of this for egregious actions now that there is a road map for navigating through the most serious repercussions," said John Douglas, counsel at Davis Polk & Wardwell and a former general counsel at the Federal Deposit Insurance Corp.
Douglas said "the rules are basically the same" for what regulatory consequences hit a foreign bank versus a domestic bank charged with a criminal offense. That means a domestic bank could similarly face prosecution without being forced to go out of business.
"The FDIC has had the ability for years to remove deposit insurance for a bank that engages in criminal conduct, but it is discretionary," Douglas said. (The U.S. branches of Credit Suisse lack FDIC protection.)
Garrett said the limited effects of the guilty plea helps the government's cause since firms will no longer be able to stave off prosecution by warning it will lead to their failure.
"What prosecutors also touted in this case was that they entered into careful discussions with regulators to make sure that there would be no charter revocation as a result of the convictions," Garrett said. "Prosecutors are saying, 'No bank is too big to jail, and we've now shown it.' But what they also wanted to show was that a conviction is practical and palatable.
"Banks and other companies often go to prosecutors and say that the sky will fall, and that's why they must have a deferred prosecution agreement. Prosecutors may be putting those claims to the test more carefully now. The 'Chicken Little' routine won't cut it anymore."
The real effect may be on banks' internal controls
Credit Suisse is expected to remain intact as an institution following the guilty plea, but that doesn't mean senior executives at the bank and competitors won't take notice of the Justice Department's actions.
"The biggest difference of all is going to be internal to the institution itself. This will have a huge internal impact on Credit Suisse's controls," said Baxter, citing his own history as a former executive at Wachovia during several major lawsuits and the implementation of the Sarbanes-Oxley Act. "I just know from having lived through this that it essentially changes executive priorities at a company."
Credit Suisse is required under the terms of the settlement to make numerous changes to its operations to better comply with U.S. tax laws, and must hire an internal monitor for up to two years. But Baxter added that internal efforts are also likely to include making certain senior officials more accountable for complying with different laws and regulations.
"When a jolt like this happens, you start needing to have people who are accountable. Up until now they have never had that pressure, but now they will say, 'You are now on point for this, if something goes wrong, we'll send the regulators to your office,' " he said.
Other banks could also respond similarly in the wake of such a high-profile deal. Baxter pointed, for example, to a rare
"This may be an early sign" of that shift, Baxter said.
At least so far, individual executives remain mostly off the hook
Some critics of "too big to jail" remain worried that despite the big headlines about the criminal charge, no top executives have been ousted as part of the DOJ probe.
"If regulators aren't going to take the bank's charter away, then the question is: How big is the fine, what kind of monitoring is there, are individuals being held accountable?" said Garrett.
A Virginia court indicted eight Credit Suisse bankers connected with the case in 2011, two of whom have since pleaded guilty, but no senior executives have come under fire for failing to stop more widespread tax problems.
"What you come away with is, there seems to be systematic and pervasive wrongdoing that went on for several years, and once again we see a situation where no senior executives are prosecuted even civilly, nobody is barred from the industry, and the company has announced that the chairman and CEO will be allowed to remain in their positions," Wilmarth said.
Without a stricter focus on executives responsible for the actions of the bank, at least putting their own fortunes on the line, there's little, if no, deterrent effect in place, Wilmarth argues.
"My view is that if they levied civil money penalties against the chairman and chief executive, forced them to resign or be barred from the industry presuming there is sufficient evidence that these guys knew or should have known what was going on that would send a message," he said. "Have we really seen anything to suggest a fundamental, transformative change in the culture to make sure this sort of thing doesn't continue?"
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