Credit Suisse’s Guilty Plea: The WSJ Uses the Right Adjective to Modify the Wrong Noun

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Yves here. I generally avoid Wall Street Journal editorials because they are designed to make readers stupider (op eds are a different matter, some decent pieces get published). Bill Black does yeoman’s work in deconstructing the Journal’s attempt to depict Credit Suisse as a victim of Department of Justice overreach.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The Wall Street Journal has editorialized about Credit Suisse’s guilty plea in a piece entitled “If Credit Suisse really is a criminal, why protect it from regulators?”  More precisely, and confusingly, the full title is:

“Holder Convicts Switzerland

If Credit Suisse really is a criminal, why protect it from regulators?”

The U.S. Saved Switzerland and Its Banks

I’ll begin by responding to the WSJ’s weird claims about Switzerland.  Far from “convict[ing] Switzerland,” the U.S. Fed bailed out the Swiss Central Bank at the acute phase of the crisis (by making large unsecured loans to it in dollars) so that it in turn could provide dollars to its two massive, insolvent, and fraudulent banks (UBS and Credit Suisse).  The Treasury, with the support of Secretaries Paulson and Geithner, used AIG to secretly bail out not only Goldman Sachs but also UBS (to the tune of $5 billion).  The unconscionable deal was so toxic that the heads of each of the three U.S. financial regulatory agencies involved (Treasury, the Fed, and the NY Fed) deny that they had any involvement in the decision – it’s the Virgin Bailout.

UBS was contemporaneously negotiating a deal with the U.S. to pay a fine of $780 million to settle its criminal liability for aiding and abetting tax fraud by wealthy U.S. tax cheats – so we, in economic substance, paid their entire fine and added a bonus of $4.22 billion that rewarded the frauds.  As always, the fine was assessed solely on UBS, not the controlling officers who grew wealthy through UBS’ frauds, so the senior officers got even wealthier through the massive tax fraud and the secret AIG bailout and they overwhelmingly got to keep their jobs and bonuses that their frauds and our bailouts maximized.  (The secret U.S. bailout of UBS is considerably larger than the fines assessed to UBS and now Credit Suisse – combined – so the claim of U.S. hostility to Switzerland that the WSJ is pushing on their editorial pages is refuted by the facts.)

That secret Treasury bailout via AIG was in addition to the Fed bailout that kept UBS and Credit Suisse from collapsing in 2008.  Herr Dr. Hummler, the head of Switzerland’s oldest private bank – the man who propagated the claim throughout Europe that the financial crisis was caused by making home loans to black Americans – bragged in my presence at a conference in Switzerland that the only reason his bank existed was to aid tax evasion by wealthy U.S. citizens.  His bank, being small and unprotected by “too big to prosecute” was eliminated by U.S. criminal sanctions.  He was up front about the fact that Switzerland’s fundamental strategy was to encourage and aid and abet the wealthiest people in the world evading their nations’ tax laws.

UBS and Credit Suisse’s idea of how to repay the U.S. for saving them and the Swiss economy was to continue to aid and abet wealthy U.S. tax cheats’ crimes and to lie about it to our investigators while working behind the scenes to try to get the Swiss government to derail the U.S. investigations and prosecutions.  Far from being vigorous, Attorney General Holder was rightly excoriated by Senate investigators for his unwillingness to prosecute clear violations of U.S. law even when Credit Suisse stone walled U.S. investigators.

But the WSJ Does, Almost, Ask the Right Question

Once we get past the faux U.S. war on Switzerland meme, the WSJ does manage to ask a question that uses the correct word.  Unfortunately, it uses it to modify the wrong nouns.  The second part of the WSJ article’s title asks:  “If Credit Suisse really is a criminal, why protect it from regulators?”  “Really” is exactly the right word, but the accurate title would have been:

If the agency leaders were really regulators and DOJ’s leaders were really prosecutors why would they be protecting the senior bankers who led the frauds that caused the financial crisis from prosecution?

The answer to the question would also be obvious – they aren’t really regulators and prosecutors.  They do not represent the interests of the banks; they represent the interests of the controlling bankers.  Credit Suisse’s tax frauds enriched both the banks and the bankers, but the faux U.S. regulators and prosecutors fail to act against the controlling officers even when they grow wealthy by looting “their” banks.  The guilty plea continues DOJ’s shameful practices.

None of what we are seeing is being done to protect the “banks” (as opposed to the controlling bankers).  DOJ could have always prosecuted, and the banking regulatory agencies could have sanctioned, the bankers responsible for the crimes.  That would have posed zero risk to the banks.  Instead, the sole sanction is to the banks – the CEO (who was the COO and General Counsel during Credit Suisse’s pervasive criminal strategy of aiding and abetting tax fraud by wealthy Americans) keeps his job and his bonuses that were largely funded by our bailouts and Credit Suisse’s tax fraud strategy.  (The low-level UBS officer committing some of their tax frauds has the distinction of both being imprisoned for his/UBS’ crimes – and receiving $104 million as a whistleblower.  Some low-level Credit Suisse staffers have pleaded guilty.)

The WSJ as Criminal Defense Lawyer for Wall Street (and Bankers Everywhere)

The WSJ cannot be condemned for home town biases in this editorial – it loves all bankers – worldwide.  It turns out that in addition to the Virgin Bailout the WSJ is peddling the idea that this is the first U.S. financial crisis in modern history that is a Virgin Crisis conceived without sin in the C-suites.

The problem is that indicting individuals requires finding actual criminal intent and behavior and then proving it to a jury when so much of what happened during the financial crisis was simply bad judgment.

Yes, the difficulty of proving fraud against elite defendants is typically demonstrating their intent because they are so good at hiding their intent behind pretense.  The WSJ’s “so much” phrase becomes a way of assuming away fraud.  I will not repeat my many columns demonstrating that the financial crisis was driven by fraudulent bankers and that their crimes could be prosecuted effectively as we did during the S&L debacle and as others did in response to the Enron-era accounting control frauds.  If our regulators today (and under Clinton and Bush II) had “really” been regulators and made the criminal referrals essential to prosecuting the elite bankers leading the frauds and if our prosecutors were “really” prosecutors there would have been thousands of senior bankers convicted and the crisis could have been prevented.  Note that the WSJ never seeks to refute the evidence that the three most financially destructive epidemics of accounting control fraud drove the current crisis.  If they were “really” regulators and prosecutors they would be demonstrating this point on a daily basis through their criminal referrals, enforcement actions, and criminal prosecutions of the elite bank officers that led the frauds.

The WSJ Proposes that Businesses Be Immune from Prosecution

The WSJ also has an interesting standard for prosecuting businesses:  it is “appropriate only if … the entire bank is a criminal enterprise.”  So, if there are any honest operations at a massive bank one cannot prosecute it.  Yes, the WSJ just called for making it impossible to prosecute any bank.  It didn’t have the courage to write that openly, of course, but that’s the effect of its proposed standard for prosecuting a bank (or any other business entity).  Seeming legitimacy will grant the firm total immunity from being sanctioned criminally.

Indeed, because, as the WSJ correctly states it is impossible that the Department of Justice (DOJ) could have believed that Credit Suisse was “entire[ly] … a criminal enterprise” it follows logically (?) that DOJ’s prosecution of Credit Suisse must be “political.”   The possibility that DOJ might not agree with the WSJ that businesses should not be immune from prosecution unless every aspect of their operations is criminal (which would require the rejection of well over a century of U.S. legal doctrine) does not enter the WSJ’s analytical process.

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  1. Jose

    A MMT-leaning cynic (unlike Bill Black, who’s MMT but no cynic) might ask this: if taxes don’t really finance government expenditures and if there is no inflation threat on the horizon, then what is so wrong about a little bit of tax avoidance?

    Everybody feels revolted because it’s a case of evasion by wealthy people. But suppose it were the American middle class doing it. Then, by paying less in taxes it would have kept resources to spend more, rely less on debt and overall help the economy get back to much needed full employment.

    Such evasion would be tantamount to a massive, economic growth-boosting, tax cut.

    So I think one might be well-advised to consider the possibility that, you know, perhaps in this particular case the WSJ may have a point in expressing a distinct lack of enthusiasm for this somewhat overzealous “Holder conviction”.

    And – last but not least – it’s certainly nice to watch the WSJ expressing sympathy for little Switzerland in this case. It’s a positive contrast to the almost chauvinistic contentment expressed by some of its liberal colleagues in the U.S. Media over this story.

    1. diptherio

      “Everybody feels revolted because it’s a case of evasion by wealthy people. But suppose it were the American middle class doing it.”

      Yes, let us suppose that the world is a different place than it actually is, and make our judgments of this world on the basis of that fantasy one. Splendid idea!

      “Such evasion would be tantamount to a massive, economic growth-boosting, tax cut.”

      Yes it would, if it were the middle-class engaging in the tax avoidance and if they were spending the money domestically. However, in the real world that we live in, the super-wealthy are the ones doing the avoiding and little if any of their evaded taxes are getting spent into the real economy.

      On second thought, maybe basing your analysis on a fantasy world isn’t such a great idea after all…

      1. RUKidding

        Thank you. Here’s a little story for you: I have a friend, who is a small business owner. Nice guy; successful but very small business; probably doesn’t make a lot of money; just enough to sustain himself; lives a very low-key life-style. Dude is great at what he does but struggles with the business end of his work – tracking the work, fees collected, paying appropriate taxes and such. Got behind in his taxes ONE year, and the IRS is all over him & garnisheeing his fees.

        Does he deserve this? In a “fair” world (which never exists), yes. Certainly he should have done a better job and paid his taxes in timely fashion.

        My point? Duly noted that the goon squad at the IRS is all over this lowly prole who is trying to make a small living. But the BIGS? Esp the big banks? ha ha ha ha ha ha ha ha! WE, the US taxpayer (including my pal), get to PAY them big bucks for, uh, hmmm…. well: just BECAUSE.

        Gimme a break.

        1. Jose

          “…the goon squad at the IRS is all over this lowly prole who is trying to make a small living”.

          Exactly my point.

          The middle class should try to avoid taxes by every conceivable means. Trying to convince it to play according to the rules of the game when the game is rigged seems a bit disingenious, to put it mildly.

          The one thing I don´t like about this celebration over the supposed “punishment” of Credit Suisse is the implicit endorsement they are giving to “goon squads” – squads that become even more dangerous when they invoke extraterritorial powers as they did in the present case.

          1. diptherio

            Calling for a tax revolt? Now we’re getting somewhere! And a tax revolt on economic grounds, I love it…

            The domestic economy needs fiscal stimulus and the Federal government refuses to provide it. Therefore, it is our patriotic and economic duty to redirect our tax dollars into our local economies.

            This thing could have legs!

            As for the “goon squad” issue, I think we should distinguish what exactly is and is not acceptable use of goons. I think goon squads forcing the uber-wealthy and MNCs to pay taxes in order to combat and prevent corrosive levels of wealth inequality is a justifiable use. Forcing people who are making anywhere near the median income (or below) is not.

            1. RUKidding

              Tax revolt only has a chance of some success if done with real, true leadership and a group effort. Encouraging the proles simply to just not pay their taxes (or whatever) is a mug’s game. It’s silly.

              If someone wishes to research tax revolts and then take a leadership role in encouraging such a thing, then I may be all for it. Someone simply saying: don’t pay your taxes, dude, that’s the ticket! is irresponsible at best.

              I agree however, that IRS would much better spend their time going after the fat cats who, both legally & illegally, indulge in tax avoidance and cheating on all levels. Let the IRS go after them, but that’s the thing: they don’t & they won’t. They go after low-hanging fruit, and that’s the end of it.

          2. RUKidding

            FWIW, my friend was NOT engaging in tax avoidance or a tax revolt. That’s another topic, and it’s not what I was discussing.

            If you want to encourage people to make decisions to engage in tax avoidance, then you need to train them on how to do it (or something) bc what you suggest – for the proles – is irresponsible, at best.

            My friend is now in some doo-doo because of innocent mistakes made. IMO, encouraging citizens to avoid paying taxes is setting them up for possible huge problems down the line. As I said: the IRS goons will go after the small people with all guns blazing. And then what? You can sit back in your comfy chair while they reap the bitter harvest of the IRS investigation.

            I disagree with your approach. It’s not even ill-thought-out. It’s inciting people to break the law while not providing them with any sort of methodology for doing so that might ensure a successful outcome.

            Tax revolts, from what I know, are mostly only effective if done as a group effort. Get real.

            1. Jose

              “…then you need to train them on how to do it”


              Why should we leave those specialized services just to the wealthy?

              The weakness of the middle classes lies in the fact that they still believe in the system and its basic fairness – they follow all the rules and then become very upset when they realize they are being screwed.

              The upper class, being much more cynical or perhaps world-savvy, relies on gaming the system to her advantage in order to enhance her prosperity.

              By spending a few hundred dollars per year in advisory services on financial and tax “planning”, middle market businesses and their owners would likely save many thousands of dollars in taxes. Ditto, for middle class professionals.

              But the majority is not even aware of such possibilities. This has to change if we are to create a level playing field as far as the payment of taxes is concerned.

  2. lolcar

    Tolerance of tax cheats as a tool of economic stabilization. Obvious corollary of the fact that the sovereign issuer of a currency doesn’t need taxes to spend or the most ham-handed attempt to discredit MMT thought you’ve ever read ?

  3. Peter Pan

    My father always said that every news paper had a funny pages section and for the WSJ it was the editorial page.

  4. flora

    The meme in the WSJ article, that we should passively accept criminal activity by the elites because it’s “just too hard to prosecute” – according to the fraud enablers and possible beneficiaries (hello Lanny) – is everywhere these days.

    Bill Black highlighting this WSJ line is spot-on:
    “The problem is that indicting individuals requires finding actual criminal intent and behavior and then proving it to a jury when so much of what happened during the financial crisis was simply bad judgment.”
    That’s baloney – or propaganda – or both.

    1. RUKidding

      Well we’ve all seen this movie before, and we all know how it ends. The rich criminals continue to get away with anything and everything, including murder and all sorts of felonies, child abuse, robbery, you name it. And then it’s all filed under various disingenuous b.s. “language,” that basically boils down to: if you’re rich, you can do whatever the eff you want. Go for it. No consequences, no repercussions, and laws? What the eff does that word mean? They let off child abusers if they’re rich enough based on the notion that the abuser just might not “like” being in jail.

      This has always gone on, but it’s just gotten more egregious and in our faces over the past decade. The attitude is: whachoogonnadoooaboudit serf? Sucks to be you. Great to be me.

  5. steelhead23

    I cast no aspersions on Mr. Black, but I really don’t care that Holder chose not to indict a singe CS bankster. The problem with wealthy individuals evading taxes through banking in Switzerland is not a problem of bad individual banksters (it is my understanding that were they to fess-up, name names, and expose the entire enterprise of wealth and income hiding, they would be in violation of Swiss law, and very likely prosecuted), the basis of the problem is Switzerland itself, or more precisely, its banking secrecy laws. Imagine how your local police department might view a pawnshop that “asks no questions” and routinely fences stolen property (unpaid taxes are essentially stolen from the U.S. Government). Why, they might do all they could to drive them out of business. That is precisely how the U.S. should treat Switzerland. No Swiss bank should be allowed to do business of any sort in the U.S, and no U.S. citizen should be allowed to hold a Swiss bank account. I am not hot to prosecute Swiss banksters, I simply think we should treat Switzerland as the international pariah it is.

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