Wednesday, April 30, 2014

Regulators and prosecutors playing with fire

From Preet Bharara, U.S. attorney in Manhattan --- "You can expect that before too long a significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it."  (NYT --- 4/30/14)

Comptroller of the Currency Thomas J. Curry "pointed to a federal law that requires him to hold a hearing about potentially terminating 'all rights, privileges, and franchises of the bank"(NYT --- 4/30/14), referring to JP Morgan if Bharara had forced the firm to admit to a crime related to Bernard Madoff.

At the moment Credit Suisse, a Swiss bank obviously, and BNP, France's largest bank, are in the crosshairs of Bharara, Eric Holder's Justice Department, and regulators, meaning the Federal Reserve and New York State.

This is really serious stuff.  In light of the success of Bharara and other prosecutors in digging up cavalier, speculative, and casual comments from the e-mails of mid-level employees at various firms under scrutiny, and then presenting those comments to "juries of one's peers" as indicative of the entire firm, financial institutions have been in the mode of settling as quickly as possible before the publicity gets too bad, the legal costs get too high, and the distraction from business as usual becomes disruptive to performance.

In their zeal to be seen as righteous protectors of the people prosecutors are way out on a limb.  If they do charge a firm with a crime, and unintentionally set in motion a series of events that causes that firm to shut down, we are potentially back in Lehman failure territory, meaning a financial catastrophe.  With the anti-bank scapegoating Obama administration having appointed most if not all of the regulators, we are in a situation that potentially has no checks and balances between regulators and prosecutors.  The Federal Reserve is perhaps the only rational player. 

In the case of major U.S. banks, many of the cases arise from firms acquired before 2008 or firms that were acquired in 2008 and 2009 at the request and under pressure from the U.S. Treasury.  In other words, firms are being sued for actions over which they had no control.  In the particular case of JP Morgan and the accusation of complicity with Madoff's ponzi scheme, most people familiar with the banking practice of servicing and processing transactions view JP Morgan's actions as completely legal and carrying no broad fiduciary responsibility.  Even the highly regarded and tough Manhattan Judge Jed Rakoff threw out of court Irving Picard's suit against JPM related to this, saying it had no merit.  Bharara tried again with a pending jury trial, and using that now tried and true method of relying on out of context and out of the line of real responsibility e-mails, he forced a settlement and thought seriously about forcing a felony admission.  There was no felony and it is questionable whether there was any wrongdoing according to the law, but why would the law stop Bharara, he's a prosecutor.

This is all troubling.  As to the two cases at hand, Credit Suisse's alleged offering of illegal tax shelters to Americans and BNP's  doing business with countries like Sudan that the U.S. had blacklisted should be handled with fines, not as crimes.  With BNP in particular, it is questionable whether any violation was intended, or was just inadvertant, incorrect, and incompetent routing of transfers through their U.S. subsidiary.  With Credit Suisse, a long established and to some a well known business practice came under more intense scrutiny as it should have, details of which are not known here.  Was it a renegade group within the firm or the firm's policy today?  I would guess the former but don't know for sure.

If either of these banks are charged with crimes and forced to shut down their U.S. business operations, or worse also cut off from all interactions with U.S. banks, this could be disaster for them.  On top of that it would be unwise for prosecutors to ignore the potential for payback by Swiss, French, and European regulators in general.  Unfortunately, who would suggest that Bharara, Holder, and their compatriots are wise.  Ambitious, beholden to vindictive interests with little insight, smart, all of these may characterize them, but wise, no.

Let's hope that it's not time to worry, and that their preening is not any more that a big, boastful self-adulating bluff.  Is it possible that they could really do something completely stupid?   


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