What’s Wrong Today:
Credit Suisse (CS), the Swiss bank, admitted on Monday in its guilty plea, that it helped American clients evade US taxes. From the plea:
For decades prior to and through in or about 2009…Credit Suisse did unlawfully, voluntary, intentionally, and knowingly conspire, combine, confederate, and agree together with others…to willfully aid, assist in, procure, counsel, and advise the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service
In March, we wrote about Credit Suisse. We gave you the flavor of Credit Suisse’s evasion efforts:
In the US, VIPs would use a secret elevator without buttons and operated by remote control to be whisked to Credit Suisse private banking suites. The Senate report says that bankers hid bank statements in the pages of Sports Illustrated rather than sending account statements and leaving paper trails
The CS financial penalty was roughly $2.6 billion in fines, with $100 million going to the Fed, $715 million to the New York Department of Financial Services, and $1.8 billion to the Department of Justice (DOJ). CS will also appoint a monitor for two years subject to the approval of the NYDFS.
This fine dwarfs that imposed in 2009 on another big Swiss bank, UBS, who paid $780m, and whose offense may have been more extensive.
Yet, the most important difference with 2009 is not the money, but the charge and the plea. UBS was permitted to enter a deferred-prosecution agreement, enabling guilt to be expunged. CS was forced to plead guilty to aiding tax evasion—making it the first big firm with ties to the financial industry to be tagged with a criminal charge since Arthur Andersen in 2003.
The DOJ is crowing about its new found willingness to convict major financial institutions, with Eric Holder claiming,
This case shows that no financial institution, no matter its size or global reach, is above the law
The guilty plea certainly seems like a step forward from the neither-admit-nor-deny settlements that banks have counted on for the past decade, but as James Kwak said in The Atlantic:
There is a risk that the Credit Suisse deal—the guilty plea coupled with ample assurances that the admitted criminal will be allowed to remain in business—could become the new version of the deferred prosecution agreement: an outcome that makes everyone happy, yet punishes no one, and ultimately becomes just another cost of doing business
The Economist reported that:
The agreement was constructed over months of negotiations between Credit Suisse and its regulators, with particular attention paid to whether an admission of guilt would lead to the dissolution of the bank
Moneynews reported on CS’s reaction to the plea:
Credit Suisse Group AG CEO Brady Dougan said he doesn’t expect a guilty plea to a US criminal charge will drive customers away from the bank:
All the discussions with clients have actually been very reassuring…We continue to be hopeful and encouraged that there will be very little impact on business as we go forward
And in the CS press release describing the settlement, there is no expectation of:
Lost licenses, nor any material impact on its operational or business capabilities
Two controversial aspects of the agreement: First is the survival of current senior management. Five lower-level employees who had been indicted for their involvement in the tax scheme but were still being paid, will be terminated. This despite comments by Benjamin Lawsky, New York’s Superintendent of Financial Services, who said that the activity at Credit Suisse was “decidedly not the result of the conduct of just a few bad apples.”
The Second aspect is a provision allowing the identities of CS’s American clients who dodged paying taxes to remain protected.
The Wall Street Journal quotes Sen. Carl Levin (D-MI):
It is a mystery to me that the US government didn’t require as part of the agreement that the bank cough up some of the names of US clients with secret Swiss bank accounts
Senator Levin’s committee had published a report on CS showing that more than 22,000 of its accounts were held by Americans, and the CS settlement leaves no clear path to getting those names.
When UBS settled with the DOJ, it disgorged 19,000 names of US account holders.
There are two main ways to punish criminals and deter wrongdoing. One is criminal prosecution of the individuals involved, ideally getting lower-level employees to cooperate and gathering evidence as far up the management hierarchy as possible. (Some ongoing prosecutions against several CS employees continue)
The other is putting a bank out of business by revoking, or temporarily suspending its license, called the “death penalty”. Even if he escapes jail, no bank CEO wants THAT on his résumé. And that penalty would seem entirely appropriate for a bank that engages in a decades-long criminal conspiracy that costs US taxpayers billions of dollars.
More from the Economist:
The conventional wisdom, however, is that you can’t revoke a large bank’s license because of potential systemic consequences. (That’s why prosecutors only pressed for the guilty plea after receiving assurances that regulators would not revoke Credit Suisse’s licenses.)
If this is true, it’s an overwhelming argument that such “too big to jail” banks shouldn’t exist in the first place.
The reason some financial institutions are too big to fail (or jail) is that their collapse could trigger losses at other major institutions and provoke a system wide panic. That was the lesson of AIG in 2008: If it failed to make good on its credit default swaps, various pillars of the financial system might have collapsed, and no one knew how far the damage would spread.
The underlying problem in 2008 was that Lehman, AIG, Citigroup, Bank of America, and other financial institutions were both illiquid and essentially insolvent: They couldn’t come up with the cash to pay their bills, and in the market at that time their assets weren’t worth enough to cover their debts.
But that’s not the case today. Our banks today are sound, so the regulators say. In that case, CS has enough assets to pay off its debts, all of its creditors and counterparties will be made whole, and there is no reason to think about a bank failure.
The fundamental point is that CS is solvent. There are no losses that would have to be absorbed by someone else. If its assets really are worth more than its liabilities, then it must be possible to close down the bank (permanently or temporarily) without harming anyone except shareholders.
As an aside, the Wrongologist spent a couple of decades as an international banker. Back then, banks were supposed to be the ultimate symbol of honesty and decency. We are now witnessing how hollow this myth has become.
Look, were you or the Wrongologist to purposely defraud the US government of $millions, (perhaps in your case, $billions), we’d lose everything and with a felony conviction, get to enjoy several years of fine dining at the greybar hotel.
Yet, CS gets to pay a fine and move on, continuing to do business in the US, and senior bankers everywhere remain a protected class for the DOJ.
As Travis Bickle said: “someday a REAL rain is gonna come and wash the scum away”. Back then, he didn’t mean bankers.
But today, he would.