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Will Justice Department’s crackdown on Credit Suisse lead to more bank prosecutions?

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    Credit Suisse is the first big bank in more than two decades to plead guilty to a felony crime in the U.S. The Department of Justice announced the charges late yesterday, saying the Swiss bank had conspired to aid tax evasion over decades by helping thousands of people hide wealth.

    Credit Suisse, which has an American investment bank, will pay $2.6 billion in penalties.

    Attorney General Eric Holder has been emphasizing of late that — quote — "No bank is too big to jail."

    The Credit Suisse case, he said, was a good example.

  • ERIC HOLDER, Attorney General:

    This announcement should send a firm and unequivocal message to anyone who would engage in dishonest or illegal financial activity that the Justice Department doesn't and we will not tolerate such activities.

    When a bank engages in misconduct that is this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.


    Holder's comments come after many experts have frequently asked about why the Department of Justice has not pursued more serious charges against some of the banks connected with the financial crisis.

    We look at the latest with this case and the bigger picture.

    Nomi Prins is a senior fellow at Demos, a progressive think tank. She's also the author of "All the President's Bankers." Before she became a writer, she worked in management positions at Goldman Sachs and Bear Stearns. And Mark Calabria, he's a former Republican staff member of the Senate Banking Committee. He's now director of financial regulation at the Cato Institute.

    And we welcome you both.

    So, Nomi Prins, to you first. Explain exactly what it is Credit Suisse is charged with. And how significant is this?

  • NOMI PRINS, Demos:

    Well, they're charged with helping both individuals and in smaller print really by extension companies those individuals might have set up to shield taxes from the United States government, from the IRS, over a period of many years.

    So, the $2.6 billion fine, to a large extent, is retribution for the taxes that should have come to the United States because of these tax evasive programs that Credit Suisse set up, but didn't.


    And how significant?


    The CEO of Credit Suisse yesterday said that this would only dent one-quarter's earnings by $1.8 billion, and they're paying $2.6 billion, so that in itself is a little bit of a shell game.

    There is a significance, in that it is a felony, it's a guilty crime. We have not seen any of that type of plea happen throughout any of the wake of the subprime crisis, so there is one. But it is also even more significant to note that this tax evasion felony has nothing to do with any of the practices that related to the subprime crisis.

    This is independent of those practices, even though there are practices related to the subprime crisis that enabled tax evasion, but they are not contained in this particular plea, nor have they been investigated or gone after by the Department of Justice for any, say, of the American big institutions.


    And I do want to ask you two about that.

    But, Mark Calabria, first, how significant is this particular prosecution?

  • MARK CALABRIA, Cato Institute:

    I don't see it as largely significant.

    I will emphasize what Nomi put — this has no relationship to the financial crisis. What we have seen here that's different than previous settlements is a guilty plea. And Holder is using that as an example to say why too big to jail is gone, but, as far as I can tell, nobody yet is going to jail.

    So, it doesn't seem to be anything where criminal charges are actually pressed against individuals. Now, usually, banks are very reluctant to criminal charges because they're worried about litigation that would follow out of this. Somehow, I suspect any of Americans the who had Credit Suisse accounts are probably not going to sue in this case. So it's much easier in this case for them to make a criminal admission if nobody is going to jail.


    But, to most people, $2.6 billion sounds like a lot of money.


    It does sound like a lot of money, but for most people, it is a lot of money, certainly a whole lot of money for me.



    But that said, it's a small amount for Credit Suisse. And more importantly, and I think this is crucial for the incentives, it's not being paid by the management. This is money paid by shareholders.

    So to the extent that — to me, a fundamental tenet of justice should the wrongdoer should pay the penalty, and in this case the shareholders are paying the penalty instead of management.


    What about Nomi Prins' point though that this is one set of charges with — that have to do with tax evasion; it is not connected directly to the subprime crisis that led to the financial collapse?


    And I think that's a crucial point.

    We have seen a number of attempts. I mean, for instance, we have seen this at SEC, where they have gone after hedge funds, but they have not gone after Wall Street, and they have gone after insider trader, but they have not gone after subprime lending.

    And so, again, I think a lot of the frustration out there in America is about the crisis and about nobody has really been held accountable in a very large way, and then you see these cases that are absolutely unrelated to the crisis. And so I do think that that's a significant question.


    Nomi Prins, what is your understanding of why more banks, why the administration hasn't gone after more banks directly because of the subprime lending issue?


    Well, for the first — first of all, the U.S. government has subsidized the very banks that have been at the center of the subprime crisis. So if you're subsidizing banks, whether it was through the smaller program of $700 billion of TARP money, whether it's through the trillions of dollars of loan facilities that were given to these banks to sustain themselves in the wake of the toxic subprime asset waterfall, whether it's the current $4.2 trillion of debt that the Federal Reserve is carrying on behalf of keeping rates low, so that these banks can continue to mark the assets that are still related to the subprime crisis higher, and to look healthier than they actually are, these are all policy initiatives that continue to swirl.

    So, if the Department of Justice were to turn around and say, oh, by the way, everything they have done is actually criminal and they have just admitted to criminal charges with respect to even tax evasion related to subprime types of assets, then it's to also go back on all the policies that have been put in place by the Treasury Department, by the Federal Reserve, and that have been approved by two administrations, under Bush and under Obama.


    Mark Calabria, pick up on why it is that you think the administration hasn't done enough?


    One of the tensions here — and I kind of think of this as quality vs. quality — it's so the easiest thing facing the Department of Justice, easiest thing facing the SEC is to get a large settlement.

    The bank is going to pay for it through shareholder money. Any executive that is facing criminal charges is going to fight tooth and nail. We saw this with the Bear Stearns hedge funds earlier on, where they fought tooth and nail and they lost on those cases.

    And so really you're seeing DOJ and the SEC, in my opinion, take the path of least resistance, which is to get a big number that sounds quite big, even if it's small for the bank, without actually going after individuals. I would rather to see a whole lot less settlements, more cases go to court, where we can all see the facts and judge the facts, and even if you got fewer convictions, you get higher-quality convictions, because, right now, you're not able to really distinguish between the actual wrongdoers and those who aren't wrongdoers.


    Well, with that — we can't in this one conversation get into all the details here, but, Nomi Prins, what about the banks' argument that if you come after us and you deal a crippling blow to us in terms of financial penalty, you could affect the entire economic infrastructure of this country?


    Well, that's been the argument that banks and the Treasury Department and so forth have been using for the past several decades.

    That was the argument behind the Third World debt crisis bailouts, the Mexican crisis, the subprime crisis. In every case, there is the notion that banks are too big to not be supported and if they are not supported they will fall and crash the economy even more so than they have been shown to do.

    But what could have happened is, rather than subsidizing these banks at the top, rather than allowing them and their chairmen, as Mark pointed out, to get off scot-free, to not go to jail, rather than give them trillions of dollars to sustain their practices, there could have been a decision at the level of the White House and the level of Washington to say we're going to help individuals, we're going to help the mortgages, we're going to help the economy, we're not going to help these institutions continue.


    So, that foot-to-the-fire problem was why we are continuing to subsidize faulty institutions and not throw people in jail who created criminal activity.


    Right. Let me just quickly cut in, because in less than a minute, Mark Calabria, there are signs, though, now that the administration is looking for other banks to prosecute.


    And so this certainly could be a big change. I don't think it so far looks like a big change.

    I think we're at the point where it's really trust but verify. Let's see what DOJ does next. I feel like this is a big of nonevent in terms of a change in real prosecution, but again it could change. We could see — go after U.S. companies.

    So, again, I think it's worth noting that Credit Suisse is not a big U.S. bank. And the real big banks that have influence with the government here are the U.S.-based banks. And so whether you're going to see the same thing with a Goldman or a Bank of America or J.P. Morgan, that remains yet to be seen.


    Mark Calabria with Cato Institute, Nomi Prins with Demos, we thank you both.


    Thank you.

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