Too big to Jail, the consequence of Too Big to Fail

Grete Chan, 24 March 2013

Too Big to Jail

There is a general consensus amongst regulators that banks have gotten “too big to jail”, a play on the original “too big to fail” on the size of the banks that have become so systemically important that it is a national risk to allow its fall. US Attorney General Eric Holder admitted that the biggest financial corporations have created such a labyrinth of their structures and practices that the Department of Justice (DOJ) has given up trying to police them in matters of corruption or criminal malfeasance, saying that bringing down any of these mega-banks or businesses could cause crash the economy.

Elizabeth Warren, senior US Senator pointed out that even though HSBC admitted to laundering over 800 million dollars for drug cartels, not a single banker involved was charged, let alone, jailed. They paid the largest fine in history in relation to money launder ($1.9 billion) and off they went without criminal charges.

It seems that the only punishment the authorities can enforce is giving out fines as if speeding tickets. However, even speeding tickets will result in demerit points which leads to the eventual loss of license, but it seems that due to the sheer size of these financial institutions, to revoke licenses would be dangerous as they are intrinsically interconnected to the country’s economy.

Caught, Paid, and Away they Went

CompliancEx published a rough list of examples of financial giants who paid their ticket and away they went without a wince:

Citigroup – SEC charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion CDO tied to the housing market in which Citigroup bet against investors as the housing market showed signs of distress. The proposed settlement would require a payment of $285 million by Citigroup that would be returned to harmed investors. (10/19/11)

Goldman Sachs – SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. (4/16/10)

Goldman Settled Charges – Firm agreed to pay record penalty in $550 million settlement and reform its business practices. (7/15/10)

J.P. Morgan Securities – SEC charged the firm with misleading investors in a complex mortgage securities transaction just as the housing market was starting to plummet. J.P. Morgan agreed to pay $153.6 million in a settlement that enables harmed investors to receive all of their money back. (6/21/11)

Stifel, Nicolaus & Co. – SEC charged the St. Louis-based brokerage firm and a former senior executive with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments. (8/10/11)

(On money laundering) Barclays and UBS. As the first one to resolve its case, Barclays paid the lowest amount, with a criminal fine of $160 million and civil penalty of $200 million, plus another £59.5 million to the Financial Services Authority, for a total of about $450 million. UBS paid a much steeper price as part of its settlement: $500 million in criminal fines, $700 million in civil penalties, plus about $323.5 million to British and Swiss authorities, for a total of more than $1.5 billion.

The Future State of our Financial System

To battle the risk-taking, there have been calls to break up the too big to fail banks, which have been met with an uproar of resistance time and time again. Questions remain on the risk of becoming less competitive in the global arena, how they wish to scope and implement this, and how to be fair.

US Federal Reserve Chairman, Ben Bernanke, said,

Too Big To Fail was a major source of the crisis and we will not have successfully responded to the crisis if we do not address that successfully.

Bernanke continues that there are tools available to policy makers including Dodd-Frank rules that force banks to hold more capital, and also to enforce higher penalties than smaller banks. As we’ve noticed in the neverending list of settlements, money is clearly not an issue for these banks.

Perhaps with the current state of our financial system and the ever globalizing financial world, it would be better to look at more specific solutions that could be easier to enforce. One would be obvious, where bankers have caused and should otherwise be found guilty of their role in the crime if they could not stand behind the veil of their employers, they should be held responsible.

Better decision making training should be provided, and it is time that the bankers realize their part in society, and while profit is the engine of the industry, it should be met with an element of social responsibility.

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Source of cases: ComplianEx

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One response to “Too big to Jail, the consequence of Too Big to Fail

  1. Pingback: Banks: Admit your Guilt | inside REG·

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