(Bloomberg) -- Now that two of the biggest U.S. banks are convicted felons, the Justice Department appears to have proven the point it set out to make a year ago -- that it could deliver the harshest penalty possible against financial institutions without inflicting fatal wounds.

It may be a tough act to follow.

The criminal admissions by five banks including Citigroup and JPMorgan Chase -- on top of the two extracted last year from Credit Suisse and BNP Paribas -- barely registered in markets, where investors were primed for the news. The Securities and Exchange Commission helped ensure the pleas wouldn’t hurt banks’ businesses, deciding late Tuesday, according to a person familiar with the vote, to give the banks the permission they needed to keep managing mutual funds and issuing certain securities.

The idea that felon banks could be welcomed back to society, after writing a check but spending no time in the penalty box, could end up backfiring on the Justice Department, according to some academics and former prosecutors. Now that it’s clear that a guilty plea’s damage can be mitigated, they reason, it may be harder for prosecutors to hold the threat of prosecution over their heads in future efforts to address wrongdoing.

EXTREME SCENARIO

The extreme scenario, while unlikely, is that a bank could attempt to call the Justice Department’s bluff, by threatening to enlist a legion of lawyers to battle the department’s accusation in court, some of these people said.

“At the end of the road, you have normalized criminal activity and some day, someone’s going to say, I’m going to take you on,” said Arthur Wilmarth, professor at George Washington University School of Law.

A bank could be cornered into such a move if they are unable to continue to get permission from the SEC or other regulators to keep doing business, according to one person familiar with these settlements. In that case, a bank would have no alternative but to fight in court, the person said.

Unlike widget-makers, whose customers will largely keep buying a widget with a competitive quality and price, banks keep customers and employees in part by selling not tangible products, but trust and integrity.

It’s possible that banks without a rap sheet could eventually attract customers and employees from felony-tinged rivals. But this, the legal observers said, is the more likely scenario: Once so many of the biggest banks have criminal records, there’s less incentive for customers or employees to defect to others.

LESS ATTENTION

“The more guilty pleas there are by large banks for various regulatory violations, it’s common sense that over time, the public would pay less attention,” said Samuel Buell, a professor at Duke University School of Law, who was a prosecutor in the government’s 2002 obstruction of justice trial of Arthur Andersen. “The more it happens, at some point, ironically, it may lose its reputational significance.”

The Justice Department follows evidence to independently determine whether a financial firm should be charged, Peter Carr, a spokesman, said in an e-mailed statement. When criminal charges are warranted, the department is “equally prepared” for a guilty plea or a trial.

“The department is committed to ensuring that the conduct is documented publicly, enabling regulators to make their own independent determinations on whether additional action beyond criminal punishment is warranted,” Carr said.

PORENTIAL DETERRENTS

Federal prosecutors still have potential deterrents at their disposal, including the prospect of bringing criminal charges against individuals. In remarks on Wednesday, leaders of the Justice Department’s criminal division declined to comment on whether they’d do so, saying investigations were continuing.

Many of the banks, in announcing the settlements, made clear that any wrongdoing could be attributed to individuals closer to the bottom of the organizational chart than the top.

“The conduct underlying the antitrust charge is principally attributable to a single trader (who has since been dismissed) and his coordination with traders at other firms,” JPMorgan, the biggest U.S. bank by assets, said in a statement. To make sure that the conduct of a few employees don’t reflect poorly on the entire firm, the bank said, it has redoubled its in-house control efforts.

“With today’s agreements and the remediation and other efforts it is making, the company is able to continue to serve its clients and does not anticipate future material constraints on its business activities,” the bank added.

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