Good news, America: We can now get guilty pleas from banks!
Bad news, America: That’s only because guilty pleas from banks are now absolutely meaningless.
Last week, JP Morgan, Citigroup, Barclays, and Royal Bank of Scotland pled guilty to felony charges of conspiring to manipulate currency prices, and UBS pled guilty to manipulating benchmark interest rates. Regulators and prosecutors found the misconduct because the traders left extensive, written tracks — in chatrooms called “The Cartel” and “The Mafia.” James Kwak wrote that Stringer Bell from the popular television series The Wire would never have tolerated the brazen, “amateurish behavior” these traders exhibited. But why should traders bother to cover their tracks, when they know they have the absolute best clean-up crew in the business — the financial regulators and law enforcement meant to police them?
When an individual is convicted of a felony, they face years of disenfranchisement — from being denied the right to vote in many states, to facing barriers to finding work, felony convictions have real-world consequences for people. But when it comes to banks, regulators and law enforcement work together to ensure collateral consequences don’t occur.
It’s not supposed to be that way. When a bank is charged with a crime, there are certain penalties that automatically kick in. Here is what the banks were facing as a result of their felonies:
- Disqualification from managing mutual funds and exchange-traded funds for RBS, JP Morgan, Citigroup and UBS.
- New barriers for issuing securities. All the convicted banks are “well-known seasoned issuers,” which is a special status that lets them quickly raise capital without having to get SEC approval first. A criminal conviction automatically disqualifies a bank from this status.
- No more immunity for earnings projections. Since you can’t verify the accuracy of the future, the law gives companies a “safe harbor” that allows them to make forward-looking statements anyway — without fear of lawsuits. The felony pleas would disqualify UBS, Barclays and JP Morgan from this immunity, thus subjecting all of their statements to the normal liability standards for fraud.
- UBS and Barclays could no longer raise unlimited amounts of money though the sale of private securities.
How many of these consequences do you think the banks actually faced? If you guessed ZERO out of four, you are correct! The Securities and Exchange Commission waived all of the above punishments. And according to Reuters, banks demanded assurance they’d get these waivers before they agreed to plead guilty to the felonies. It’s not enough that the banks are avoiding prison — they needed a guarantee they wouldn’t see the regulatory equivalent of probation, either.
At least one of the SEC’s Commissioners, Kara Stein, voted against granting the final three waivers in the above list — and we know this because of the scathing dissent she released. Commissioner Stein wrote that granting these waivers “has effectively rendered criminal convictions of financial institutions largely symbolic.” How the rest of the Commission voted isn’t available online — and when I called the SEC to ask for the formal vote, I was told that I could see it, but only if I came to the agency’s Public Reference Room between 10am — 3pm. How’s that for transparency in a government agency that prides itself on public disclosure!
This isn’t the first time we’ve seen a financial regulator work to bury Wall Street’s bodies. When Credit Suisse pled guilty last year to helping American clients dodge U.S. taxes, the Department of Labor (DOL) also chose to waive away the automatic penalties. Following the granting of the waiver, Melanie Nussdorf, a lawyer representing Credit Suisse, sent an email to the Department with “thankyou” repeated 600 times. In response, a DOL special assistant named Erin Hesse wrote, “I hope this one ‘you are welcome’ covers all those thank yous.”
Regulators aren’t just busy getting cosy with the lawyers of the banks they regulate — they’re also busy making excuses. At an event at the London School of Economics, Treasury Secretary Jack Lew said that the waivers “make sure that the impact of the penalties doesn’t have unintended consequences.” But Congress created these automatic disqualifications for a reason— it was very much an intended consequence. Unfortunately, it’s an intended consequence regulators continue to ignore, as they posture that they know better than both Congress, and the everyday Americans who don’t have the luxury of a captured cop on the beat.