Too Big To Fail is also Too Big to Jail (or even Prosecute)

Criminal Charges Against Banks Risk Sparking Crisis

By Greg Farrell, Dakin Campbell and Keri Geiger May 1, 2014 1:00 AM ET

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.
Stung by lawmakers’ criticism that multi-billion-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 (CSGN) and BNP Paribas SA (BNP), 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.

Photographer: Victor J. Blue/Bloomberg

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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.