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.