“Too big to jail” nev­er fails...for larg­er than life crim­i­nals:

Bloomberg
Crim­i­nal Charges Against Banks Risk Spark­ing Cri­sis
By Greg Far­rell, Dakin Camp­bell and Keri Geiger May 1, 2014 7:03 AM CT

As U.S. Jus­tice Depart­ment pros­e­cu­tors angle to bring the first crim­i­nal charges against glob­al banks since the finan­cial cri­sis, they’ll have to stare down warn­ings of uncon­tain­able col­lat­er­al dam­age.

The 2002 col­lapse of Arthur Ander­sen, the account­ing firm indict­ed in the Enron scan­dal, “should be a les­son” for pros­e­cu­tors, Brad Hintz, an ana­lyst at San­ford C. Bern­stein & Co., said today in an inter­view on Bloomberg Tele­vi­sion. “Don’t play with match­es.”

Stung by law­mak­ers’ crit­i­cism that multi­bil­lion-dol­lar set­tle­ments have done too lit­tle to pun­ish Wall Street in the wake of the finan­cial cri­sis, pros­e­cu­tors are con­sid­er­ing indict­ments in probes of Cred­it Suisse Group AG and BNP Paribas SA, a per­son famil­iar with the mat­ter said. Even after talk­ing with finan­cial reg­u­la­tors about ways to mit­i­gate dam­age — such as ensur­ing banks keep char­ters — pros­e­cu­tors might not ful­ly under­stand con­se­quences for the mar­ket, accord­ing to indus­try lawyers and bankers who are fol­low­ing the case.

Bank clients — includ­ing trustees, fidu­cia­ries and pen­sion funds — could be forced to cut ties with a finan­cial insti­tu­tion labeled a crim­i­nal enter­prise, the lawyers and bankers said, ask­ing not to be named because they weren’t autho­rized to talk pub­licly. Coun­ter­par­ties also might think twice before enter­ing into bil­lion-dol­lar trans­ac­tions with such firms. Dam­ag­ing a bank’s busi­ness could lead to broad­er fall­out across the finan­cial indus­try, just as Lehman Broth­ers Hold­ings Inc.’s col­lapse in 2008 prompt­ed investors to with­draw from oth­er firms on con­cern its exit would set off a wave of loss­es.

Spook Cus­tomers

Crim­i­nal action would have to be han­dled so that any review of a bank’s char­ter wouldn’t spook cus­tomers or revoke a firm’s license, said Gil Schwartz, a part­ner at Schwartz & Ballen LLP and a for­mer Fed­er­al Reserve lawyer.

“The mere threat of requir­ing a hear­ing could cause cus­tomers to lose con­fi­dence in the insti­tu­tion and could cause a run on the bank,” Schwartz said.

The warn­ings show the resis­tance pros­e­cu­tors face in seek­ing to prove glob­al banks aren’t too big and sys­tem­i­cal­ly impor­tant to indict. Preet Bharara, the U.S. attor­ney for the South­ern Dis­trict of New York, sig­naled in a March speech that a large finan­cial firm would be charged soon, despite the industry’s bleak pre­dic­tions of fall­out.

‘Nuclear Win­ter’

“Com­pa­nies, espe­cial­ly finan­cial insti­tu­tions, will do almost any­thing to avoid a tough enforce­ment action and there­fore have a nat­ur­al and pow­er­ful incen­tive to make pros­e­cu­tors believe that death or dire con­se­quences await,” he said. “I have heard asser­tions made with great force and pas­sion that if we take any crim­i­nal action, the skies will dark­en; the oceans will rise; nuclear win­ter will be upon us; and the world as we know it will end.”

Cred­it Suisse has been the tar­get since 2011 of a U.S. crim­i­nal probe into whether it helped Amer­i­cans evade tax­es. BNP Paribas has been inves­ti­gat­ed for pos­si­ble vio­la­tions of U.S. sanc­tions bar­ring busi­ness with pro­hib­it­ed coun­tries.

Shares of Zurich-based Cred­it Suisse fell 0.3 per­cent yes­ter­day to 27.91 francs after news reports on pros­e­cu­tors’ delib­er­a­tions. BNP Paribas dropped 3.2 per­cent to 54.11 euros. The Paris-based firm said it may need to pay much more than the $1.1 bil­lion it set aside for the U.S. sanc­tions case.

Spokes­men for both firms declined to com­ment on the pros­e­cu­tors’ con­sid­er­a­tions.

Lim­it Fall­out

There are a vari­ety of ways for pros­e­cu­tors to lim­it dam­age from crim­i­nal charges. One option would be to force a bank’s sub­sidiary, rather than the par­ent com­pa­ny, to enter a guilty plea, said the lawyers and bankers. The Jus­tice Depart­ment has gone down that path in set­tling charges involv­ing the For­eign Cor­rupt Prac­tices Act, which for­bids U.S. com­pa­nies from brib­ing for­eign offi­cials to win busi­ness.

“I would expect reg­u­la­to­ry dis­cus­sions with these banks in ques­tion will avoid sys­temic con­se­quences,” said Dar­rell Duffie, a finance pro­fes­sor at Stan­ford University’s Grad­u­ate School of Busi­ness in Stan­ford, Cal­i­for­nia. “I expect the sit­u­a­tion to be con­trolled.”

Many con­cerns expressed by finan­cial pro­fes­sion­als focused on less tan­gi­ble fall­out, such as lost con­fi­dence in a firm. Some com­pared such a sit­u­a­tion to Bear Stearns Cos., which was bat­tered by doubts about its strength in 2008, lead­ing to its emer­gency sale to JPMor­gan Chase & Co.

Crim­i­nal Past

Client psy­chol­o­gy also could come into play. For exam­ple, even if invest­ment man­agers aren’t pro­hib­it­ed from work­ing with a bank, they may shy away because they don’t want to explain why they put funds in a firm with a crim­i­nal past.

Mind­ful that the specter of crim­i­nal charges helped put finan­cial insti­tu­tions such as Bank of Cred­it and Com­merce Inter­na­tion­al and Drex­el Burn­ham Lam­bert Inc. out of busi­ness, pros­e­cu­tors in Wash­ing­ton and New York have met with rep­re­sen­ta­tives of the Fed­er­al Reserve and the Office of the Comp­trol­ler of the Cur­ren­cy to dis­cuss the reg­u­la­to­ry risks of indict­ments, accord­ing to two peo­ple briefed on the mat­ter.

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Wait, so pros­e­cu­tors want to avoid tak­ing down the next Drex­el Burham Lam­bert or BCCI?! Uhhhh...are these ‘nuclear win­ter’ threats pure­ly metaphor­i­cal?