House Subcommittee Reviews Too Big to Jail Policy

Tuesday, 04 Jun 2013 02:20 PM

By Robert Feinberg

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Ever since Attorney General Eric Holder testified last December before the Senate Judiciary Committee that some financial institutions are so large or complex and the consequences to innocent third parties from holding them criminally liable so great that they could not be prosecuted because to do so might imperil the U.S. and world economy, there has been a lot of chatter in the press and in the blogosphere about the implications of this policy of the Department of Justice (DOJ).

Accordingly, the House Financial Services Committee's Subcommittee on Oversight and Investigations, chaired by Patrick McHenry, R-N.C., held a hearing on May 22 titled, "Who Is Too Big to Fail: Are Large Financial Institutions Immune from Federal Prosecution?"

In his opening statement, McHenry played the original Holder statement, then noted that in testimony last week before the House Judiciary Committee, Holder appeared to contradict himself when he said, "There's no bank, there's no institution, there's no individual that cannot be prosecuted by the Justice Department."

McHenry expressed the hope that the hearing could clarify what the policy is and whether more aggressive enforcement might reduce the incentive for the largest banks to engage in risky behavior.

The only witness was Mythili Raman, acting assistant attorney general of the criminal division in the DOJ. As discussed in yesterday's article, subcommittee hearings typically feature witnesses from middle levels of agencies. Thus, the question might arise, why bother with this hearing, since neither Holder nor any other cabinet member or agency head is required to appear before subcommittees? This hearing is an example of a circumstance where it might be more useful to hear from a mid-level representative of a department or agency than from the star, because Raman gave a star performance.

McHenry was obviously impressed when he noted at the outset that Raman received her undergraduate degree from Yale and her law degree from University of Chicago, and the ranking Democrat, Al Green, D-Texas, elicited from her that she has been a career prosecutor who has handled hundreds of cases and has served at the DOJ for 17 years.

Raman answered questions, many of which were tough and even hostile, forthrightly and demonstrated a firm grasp of the details of the work she oversees on an acting basis. Yet, in spite of this outstanding performance, some subcommittee members were left dissatisfied and even a bit provoked, and readers and viewers who have questioned the fairness of a law enforcement policy that appears to favor large, risky, recalcitrant, too big to fail financial institutions might come away from this hearing even more enraged than before.

Raman explained in detail the policy and process, which dates back to 1999, by which the DOJ decides whether to prosecute entities and individuals for financial crimes, and Green compiled, with the assistance of DOJ, a list of actions the department has brought against financial institutions. But the witness could not name a single person who has gone to jail for crimes related to the 2008 episode of the ongoing financial crisis.

Nevertheless, Raman repeatedly insisted that no bank is too big to prosecute. Asked whether this statement puts her at odds with the statement of Holder that there are difficulties, including potential collateral consequences, Raman responded, "We're not deterred by difficulty, because we have a dedicated staff of prosecutors and agents."

The remainder of this article will provide examples of insights gleaned from the hearing, then conclude with suggestions of ideas that might be explored in any effort to break away from the hold the too big to fail banks exert over federal prosecution policy:

1. We dare you. Raman confirmed that too big to fail banks argue to prosecutors that they should not be prosecuted because of the very collateral consequences Holder has described.
2. Enthralled by regulators. Raman went on to state that the DOJ tests such assertions by consulting with regulators and testing the claims of the banks regarding collateral consequences, and she said the DOJ works "hand in glove" with the regulators to develop an appropriate resolution for each case.

I would suggest that given the notorious coziness of the regulators with the industry, it is no wonder that the DOJ comes away in a hypnotic trance that disables it from prosecuting too big to fail banks.

3. Jumbled systems. When subcommittee members sought documentation to verify the determinations of prosecutors as to how the nine factors Raman outlined as listed in the manual for federal prosecutors, Raman responded that nothing has turned up yet from closed cases that she could share with the committee. She added that each of the 94 U.S. attorneys and each of the various offices within the DOJ has its own policies and systems for maintaining this documentation.

I am duly astonished and would suggest that the circumstance cries out for a common systems solution, if for no other reason than to enable prosecutors to use their documents seamlessly as they move from job to job within the system.

4. Drug jail v. bank jail. Maxine Waters, D-Calif., protested that young people caught with 5 grams of cocaine can get five years of jail time and 10 years for 50 grams, yet bank executives who misappropriate hundreds of millions or billions of dollars remain free. Emanuel Cleaver, D-Mo., said, "When we hear that none of the Wall Street culprits has gone to trial, it contributes to the feeling that if you rob a convenience store, you go to jail; if you rob the nation, you just get richer, you pay a fine."

5. Corzine skates. In the most dramatic moment of the hearing, Michael Grimm, R-N.Y., who was himself a federal prosecutor, made the case and presented the documents, including the report of the trustee for MF Global, to support that MF Global CEO Jon Corzine perjured himself when he testified that he had no idea what became of $1.6 billion of segregated customer funds of MF Global. Grimm declared that 99 percent of such cases he encountered would result in jail time.

6. Break them up. Brad Sherman, D-Calif., told Raman that if banks are asserting that the consequences of prosecuting them would be too great for the financial system and the economy, they must be broken up in order to ensure that they could no longer make this claim.

Perhaps the biggest lesson of all is that if prosecutors are as able, aggressive and highly motivated as Raman convincingly says they are, they need to be more imaginative and to fashion more effective tools to bring recalcitrant zombie banks to heel. Here are some of these tools:

1. Bigger sanctions for bigger institutions. Sherman stated that he would hate to think that financial institutions whose crimes can threaten the stability of the financial system should go free on that basis. I would suggest that any bank that can pose such a threat should be subject to higher penalties and closer supervision for the very purpose of deterring and preventing the banks from committing such devastating crimes.

2. Debarment. Raman cited the debarment process as an example of a tool that can be applied to government contractors. It has occurred to me that given that they are backed by the federal safety net, banks could be defined as federal contractors subject to debarment as a sanction for violation of laws and regulations.

3. Conservatorship. When banks persist in repeatedly violating laws and regulations, perhaps because they have incorporated such conduct into their business plans and the resulting fines into their budgets, they could be placed under a conservatorship that would empower federal agents to take charge of their compliance until the bank demonstrates the ability to manage this function reliably.

In short, the regulators need to be as imaginative in fashioning tools to contain the risk posed by too big to fail banks as bank lawyers are resourceful in concocting arguments that the regulators and prosecutors will accept as excuses for not enforcing laws and regulations.

Ultimately, this means that the failed regulatory system must be restructured so that it is no longer run by staff who function as de facto lawyers for the banks.

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