Thank heavens Eric Holder finally bagged a bank. The Attorney General scored a political win and appeased the Blame-the-Bankers crowd by forcing Credit Suisse to plead guilty to a criminal charge. Of course, the case against CS had nothing whatsoever to do with subprime lending, excess leverage or credit derivatives that contributed to the financial crisis. But bringing a global bank to heel -- a “too-big-to-jail” bank -- is nirvana for progressives like Elizabeth Warren who yearn to punish the financial industry for their role in the financial crisis.
Still, even for a White House long on political gestures but short on substance, the Swiss giant’s guilty plea – the first by a major bank in two decades – turns out to be rather thin Obama theater. The settlement with Credit Suisse practically guaranteed modest fallout for the bank – no licenses lost, no change to senior management, no lasting financial impact.
The test? Credit Suisse had the audacity to conduct a sizeable bond offering--its first in three years--just days after it confessed to helping Americans cheat the tax man. Against expectations, the firm’s sale of $5 billion in senior debt went off without a hitch; the securities didn’t even command a premium over similar bonds being marketed the same day from rival (and guilt-free) Deutsche Bank.
This, despite a spasm of activism from Moody’s, which had downgraded the outlook for CS from “stable” to “negative.” The bond sale might be considered a referendum on investors’ confidence in the ratings agency as much as the sanctity of Swiss creditworthiness. Ironically, because of ramped-up capital requirements demanded by regulators in the aftermath of the financial meltdown, the balance sheets of big banks – and certainly those in Switzerland – are in strong shape. The $2.6 billion charge against the bank is manageable.
Three CS employees already on leave were fired as part of the settlement; for the moment – and despite calls for blood from some Swiss politicians --CEO Brady Dougan and Board Chair Urs Rohner remain in place. Apparently the board discussed ousting the top brass, but since the cheating was traced back nearly a century that was considered unnecessarily disruptive.
So, one might ask, what was the point? To put CS out of business? Hardly. The SEC and regulators agreed that no permits would be revoked and no clients would be barred on fiduciary grounds from dealing with CS, preventing the kind of pressures that drove Arthur Anderson out of business in 2002.
Was it to punish CS? Maybe. Certainly, for decades the Swiss company broke U.S. laws demanding that our citizens declare and pay taxes on funds held or invested overseas. Intervention was long overdue. But, there was no particular reason for the crackdown today, and previous prosecutions along these lines – notably UBS in 2009 -- have not required a guilty plea. Prosecutors did not demand that Credit Suisse turn over the names of American tax cheaters; such revelations are illegal according to Swiss banking laws and would have required an exemption from the Swiss Parliament such as UBS received in 2009. That path would almost surely mean the removal of senior management.
Ultimately, this was the point: for political reasons, Eric Holder needed to net a banker – any banker. In 2013, Holder had told a Senate Committee that it can “become difficult” to prosecute a bank since a guilty plea could threaten the economy.
Ever since, he has tried to walk back those words, which some took as a confession of impotence or – worse—the White House being too cozy with banks. After the CS settlement, the Attorney General boasted “This case shows that no financial institution, no matter its size or global reach, is above the law.”
In reality, Holder was right. It was, and remains, “difficult” to go after large financial institutions without imperiling the recovery. Critics of bank bailouts fail to grasp that the economy cannot expand without credit; bank loans grease the skids. Treasury Secretaries Paulson and Geithner will forever be seen (unfairly) as pawns of Wall Street.
Had they, in fact, allowed our major financial firms to collapse – causing runs on savings institutions, chaos in mortgage markets, shuttering of millions of businesses – they would have paved the way for the Greater Depression. We barely avoided that fate, because of the unpopular bail-outs. History, I suspect, will treat our Treasury officials more kindly.
The Obama administration has created its own dilemma, saving the banks but also casting them as the primary villains in a financial crisis enabled by numerous bad actors – from the ratings agencies to mortgage brokers to hedge funds piling up leverage to politicians pushing expanded home ownership to those people who irresponsibly took on more house than they could afford and to the banks.
The simple populist rhetoric blaming banks appeals to Democrats whose fingerprints are all over some of our worst decisions, but it doesn’t help speed our recovery. Moreover, it threatens to drown out other important policy issues. Even now, some are urging to again loosen credit restrictions on subprime borrowers. The Obama narrative also means Holder is pushed to prosecute.
Credit is still tight, constricting new business start-ups and new home purchases. Bankers fear straying afoul of regulators who are constantly changing balance sheet requirements and the definitions of what constitutes top-tier capital. The push to make banks safer may be beneficial long-term but there is a cost -- a slower recovery.
The push to prosecute could be infinitely more damaging, potentially rattling credit markets and raising interest rates. As top cop on the beat, Eric Holder will doubtless continue to look for political wins, and he will apparently score some hits. Let us hope those continue modest, and that his hunt for scapegoats does not further retard our progress.
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