DoJ Does Victory Lap on Credit Suisse Guilty Plea on Single Criminal Charge

Underwhelming sanctions against banks have become such a dog bites man story that they would normally seem to be beneath notice. However, the officialdom inched out a bit in wresting a guilty plea from the parent company of a bank, Credit Suisse, on a single criminal charge. Per the Wall Street Journal:

The criminal charge filed Monday in federal court outlined a decadeslong, concerted attempt by Credit Suisse to “knowingly and willfully” help thousands of U.S. clients open accounts and conceal their “assets and income from the IRS.” Mr. Holder said the bank destroyed account records sent to the U.S. for client review, concealed transactions and “failed to take even the most basic steps to ensure compliance with tax laws.”

The bank agreed to pay 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. Credit Suisse will also appoint a monitor for two years subject to the approval of the DFS.

For the most part, the mainstream media is dutifully accepting the spin of the Department of Justice, that this case is significant by virtue of being the first plea of this sort made by a bank in over two decades. The fact that those intervening years saw regulators generally take a very hands off approach to banks, and that we had a global financial crisis with no measures of this sort taken against the perps somehow escapes mention. And let us also not forget that a mere three weeks ago, Jesse Eisinger ran an apology for the Department of Justice in the form of a New York Times Sunday Magazine that argued…hold your breath…that the DoJ was victim of having been too ambitious in the past. And lest you think I’m being unfair, Eisinger took questions at an Occupy Wall Street Alternative Banking meeting right before the story ran and I got unhappy e-mails from the session as to the line Eisinger was taking in response to questions, particularly his use of the repeatedly debunked “these cases are just so darn complicated” trope.

So what is noteworthy about the Credit Suisse guilty plea?

As usual, no current senior officials were targeted. Pray tell, what is the deterrent value? The fines, which are more than the bank expected to pay, ultimately come out of taxpayer hides. Admittedly, there is a hue and cry in Switzerland for some heads to roll, but that would be an accidental by-product. As the New York Times notes:

For Credit Suisse, other than the fines and the reputational stain of being a felon, the implications are likely to be limited. The bank may lose some clients but is otherwise expected to survive largely unscathed. The plea deal also enables it to move beyond a case that had prompted a congressional hearing and had thrust the bank into an international squabble over tax dodging. If the bank had continued to fight the case, it would have been indicted, calling into question its very existence.

The New York Department of Financial Services had also wanted to have Credit Suisse suspended from access to dollar clearing services, but that very suggestion likely generated a freakout among other banking regulators.

Now the Department of Justice had previously indicted 7 individuals, three lower level bankers and four former senior managers, including the former North American head of offshore banking. The Financial Times reports that the three indicted bankers still on the Credit Suisse payroll will be fired as part of the settlement.

The authorities are much more concerned about crimes against the government and its apparatus, in this case, payment and the surveillance tax system than they are damage to the real economy or frauds that hurt ordinary citizens. Remember, the payment system has become a critical instrument of foreign policy, as we can see with America’s use of sanctions against Iran and Russia. Tax evasion enables money to be moved around in ways that the US can’t track as readily. Mind you, the US is not cracking down on our affiliated tax haven, the Caymans, or Wyoming limited liability corps, or pressing the UK to go after its tax havens. The Swiss have been made the targets, which may have been in part because until recently they were the most user-friendly choice for wealthy Americans trying to hide from the IRS.

And even then, what appears to have gotten the officialdom upset about Credit Suisse was its intransigence once the US made it clear it was determined to go after secret Swiss accounts. Again from the Journal:

Even after a U.S. crackdown on Swiss accounts in 2008 led Credit Suisse and rival UBS AG to tighten restrictions on the kinds of services they would provide to American customers, they continued to take steps that hindered investigators, the filing said. Credit Suisse didn’t conduct a thorough inventory of the accounts its managers oversaw, and some managers helped clients move their assets to other offshore banks so they would remain hidden to the U.S., according to the filing.

When it became clear in 2010 that the Justice Department was investigating the bank’s conduct, Mr. Holder said Credit Suisse “failed to retain key documents, allowed evidence to be lost or destroyed, and conducted an inadequate internal inquiry.”

So the authorities got accountholder names, right? Remarkably, no. Again from the Journal:

While Credit Suisse isn’t turning over names of account holders as part of the agreement, it is handing over information that Deputy Attorney General James Cole said would lead to specific account holders.

“There’s going to be a substantial amount of information that we’re going to get that will enable us to find out who the account holders are and take the appropriate action,” Mr. Cole said….

Sen. Carl Levin (D., Mich) said it is “a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts.”

Needless to say, it was a foreign institution that was targeted.

Let me return to one critical issue: why no individuals were prosecuted or even fined. This case, like so many we have discussed, seems ideally made for at least a civil action under Sarbanes Oxley against the CEO and CFO, since they must certify the adequacy of internal controls. The most charitable coloration you can put on what looks an awful lot like obstruction of justice (although Credit Suisse was not charged with that) was that it was a failure of internal controls. And Sarbanes Oxley is designed so that a civil action can easily tee up a criminal case on the same control deficiencies. So why didn’t the officials go that route?

One would be that a serious civil action, if the bank executives fought it, would lead to all sorts of dirt being unearthed in discovery that might call the bank-wide settlement into question.

But I think there’s a much more obvious reason that no one talks about: Eliot Spitzer.

Spitzer was aggressive and creative in how he used indictments to bring institutions to heel, to the point where he was criticized for forcing settlements via the cudgel of threatening an indictment (which as various reports have noted, would be far more damaging, in that more of its customers would be required to halt business with it, than this limited guilty plea). The Wall Street Journal would regularly inveigh against Spitzer for using strong-arm tactics and not allowing companies to have their day in court, since they were not able to fight the sort of charges he was levying (as in the company would not survive to have its day in court).

What I suspect brought Spitzer down was his pursuit of AIG, in which he forced the resignation of Hank Greenberg. Greenberg is an extremely wealthy, powerful, and by all accounts, vindictive individual. It is almost a certainty that Spitzer’s use of prostitutes was discovered though extensive personal investigation, and odds are high that Greenberg was behind it.

Any prosecutor who was thinking of targeting banks would think twice based on Spitzer’s downfall. And you don’t have to be frequenting prostitutes to be at risk. There are all sorts of ways information gleaned through personal investigation can be used to bring someone to heel: the threat of revealing a past or current affair to an unsuspecting spouse; finding evidence of resume inflation to land a position; current use of marijuana (remember, prosecutors are held to a higher standard than mere mortals) or more serious drug experimentation in the past. And that’s only a starter list. Given the ability to glean so much more information about a person’s habits than was dimly possible in the past thanks to the use of smart devices that know way too much about their users, prosecutors are even more vulnerable to blackmail than they were in the past.

So while the DoJ is taking baby steps in the right direction, as readers know all too well, it’s too little, too late as far as ordinary citizens are concerned. Senior bankers remain a protected class.