DOJ Must Prove Commitment to Ending 'Too Big to Jail'

In 2012, then-presidential candidate and former Massachusetts governor Mitt Romney informed the public that corporations are people too. The U.S. Department of Justice has treated them as such, bringing criminal charges against the nation's largest banks for a host of offenses committed both before the financial crisis and after.

But the DOJ has thus far neglected to treat top bankers as people worthy of prosecution. Now officials say they're changing their tune. In a widely reported speech in New York last week, Deputy Attorney General Sally Yates announced that the DOJ would focus on prosecuting high-ranking individuals for white-collar crimes.

Skeptics argue that this new policy may be more of a public relations stunt than the dawn of a new era in law enforcement. But whether the DOJ's shift from targeting corporations to targeting people is a sham or a serious policy change, the move must be understood in the context of the Obama administration's posture vis–à–vis the financial services industry in general and systemically important banks in particular.

With the Dodd-Frank Act, the administration opted for massive over-regulation of large banks and their continued subsidization in lieu of meaningful structural reform of the financial industry. This deferential approach was dictated largely by the dire condition of the large banks at the time, most of which had just recently been bailed out by the government.

Rightly or wrongly, punishing these institutions or the individuals that ran them into the ground was not a priority for either the White House or DOJ.

So when former Attorney General Eric Holder announced what came to be known as the DOJ's "too big to jail" policy toward the big banks, the Washington establishment was hardly shocked by it. The administration's policy of cosseting the big banks was well understood. The shocking part was that Holder had the political naiveté to admit the policy existed at all.

After much harrumphing from the general public, Holder's policy was withdrawn and replaced with the more politically correct dictate that no one is above the law. As if to prove this point, plea deals were soon extracted from a handful of large banks along with monumental penalties paid for by shareholders. Prosecutors continued to avoid bringing charges against executives.

The DOJ has also pursued many small fry for these and other offenses. Consider the indictment last week of the operator of a firm complicit in arranging reverse-mergers between Chinese and U.S. companies.

Still, the big fish always seem to get away.

It would not have taken a countrywide search, nor would Holder have had to wait until the music stopped, to identify two prominent persons of interest whose financial institutions contributed enormously to the financial crisis.

Sure, bringing cases against these individuals would have been difficult. But the enormity of their transgressions, the lavishness of their compensation, and the depth of the harm they caused would be well worth the effort.

Let us stipulate that there is a serious problem if the CEO of a company with 3,000 subsidiaries operating around the globe with the implicit guaranty of the taxpayers is clueless about what is going on in his or her company. It would also seem to be the case that the head of an institution that admits to felony charges, pays billions of dollars in fines and penalties, and calls a $6 billion loss "a tempest in a teapot" has a reckless disregard for the public interest.

Now, consider that twelve of the biggest banks have reached a tentative settlement with investors over rigging the swaps market for derivatives, agreeing to pay penalties of $1.87 billion. As you may recall, this is the same market that the big banks and their influential lobbyists were willing to cripple the federal government over so that they could continue to perform a risky swaps activity in the cozy confines of taxpayer-insured banks, rather than pushing the activity out into uninsured affiliates.

The DOJ has been investigating this conspiracy for six years, according to reports, but the investigation has lost steam.

Were C-suite bankers clueless about the collusion in this market and the frantic lobbying to protect it? Perhaps exploring the answer to this question would be a good test of the DOJ's new tough stance against top brass. I'm looking at you, Messrs. Dimon, Moynihan, et al. I'm also looking at you, Ms. Yates.

No doubt the new DOJ policy will be protested by bank chiefs who have the best lawyers money can buy. But the reputations of a few bankers who have recklessly brought the financial system to the brink of collapse are a small price to pay for public catharsis. Now that the conviction of a corporation is apparently just a ho-hum affair, perhaps the threat of C-suite indictments will be more chilling.

Professor Cornelius Hurley is director of the Boston University Center for Finance, Law & Policy.