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Credit Suisse plea raises risk of U.S. bank indictment

by Ronald Orol  |  Published May 21, 2014 at 2:17 PM

Analysts and observers describe the Justice Department's $2.6 billion landmark settlement with Credit Suisse Group as a "felony light" approach that sends a message: Big U.S. banks could be required to plead guilty for their offenses. At issue are criminal charges filed Monday in federal court by the Justice Department over efforts by Credit Suisse to help its account holders actively deceive U.S. tax authorities by "concealing assets and income in illegal, undeclared bank accounts."

Many observers have worried for years that such a criminal indictment -- the first at a big financial institution in over a decade -- could force a big bank into bankruptcy, following in the footsteps of Arthur Andersen's collapse after a criminal indictment in 2002 and Drexel Burnham's indictment and forced Chapter 11 filing in 1990. The Arthur Andersen conviction was later reversed.

Most experts said it is unlikely bankruptcy will be the result from any bank cases.

"The Justice Department had three different choices," said Boston University law professor Cornelius Hurley. "They could have indicted and let the chips fall where they may, they could have not indicted and continued the perception that big banks are too-big-to-jail or they could create a felony-light scenario and they chose option three."

What is the felony-light approach? A key part of the deal is that regulators in Washington won't seek to revoke Credit Suisse's license. A loss of its license would have effectively put the huge Swiss bank out of business. The Federal Reserve, in its order, said that it decided not to exercise its authority to "terminate the activities and operations" of Credit Suisse's offices in the U.S.

In addition, according to people familiar with the situation, the Department of Labor and the Securities and Exchange Commission are both willing to grant some waivers to allow the bank to continue to do business with public pension funds and other institutions. For example, Credit Suisse needs a waiver to continue to operate as a so-called Qualified Professional Asset Manager, or QPAM, so it can engage in a wide variety of transactions.

The choice of Credit Suisse -- and expected criminal charges against French BNP Paribas -- sends a message to observers that criminal indictments for big U.S. banks could occur soon. "This shows that there is a greater than 50% chance a U.S. bank could be criminally charged," said one former bank regulator who advises large financial institutions. "It is easier to pick on a foreign bank first because they don't have natural constituencies in the U.S."

Regulatory observers argue that the indictment comes in response to pressure imposed by a large number of lawmakers, such as Sen. Elizabeth Warren, D-Mass., over concerns that large financial institutions weren't sufficiently punished for their role in the 2008 financial crisis.

It also comes after U.S. Attorney General Eric Holder last year suggested that some of the largest banks have become so big that they are difficult to prosecute because of the negative impact criminal charges could have on the economy. He later backtracked, saying his comments were misconstrued and that "banks are not too big to jail."

Hurley argued that Holder painted himself in a corner when he backtracked, which led to the Credit Suisse indictment. He argued that the Justice Department chose to indict a foreign bank to gauge the reaction before bringing criminal charges against a U.S. institution. "They could be testing the waters and say let's indict a too-big-to-fail foreign bank and see how that plays out and if it is a disaster end it there and if it isn't then go on to bring criminal charges against big U.S. banks," Hurley said.

Dennis Kelleher, president of consumer advocacy group Better Markets, said he expects similar criminal indictments at U.S. banks. However, he described the Credit Suisse charges as mostly "pretend" and "public relations" and not law enforcement. "This is the DOJ continuing their unending fight against crime with PR instead of prosecution," he said. "It is almost guaranteed that there will be a pretend punishment against a U.S. bank for something so that the DOJ PR machine can claim that they are tough on everybody."

Nevertheless, a wide variety of negative implications can be expected from the charges. A person familiar with Credit Suisse noted that lots of pension funds, municipalities and other counterparties that will be legally precluded from doing business with Credit Suisse while others won't be sure if they want to continue. He added that there are concerns about what can happen between when the indictment was introduced and the waivers are granted. "A lot of people are asking themselves: 'Do we want to trade with these guys or not?' " he said.

Not everyone believes U.S. banks can handle even these kinds of criminal indictments. Jaret Seiberg, analyst at Guggenheim Securities LLC in Washington, argued that the Justice Department will conclude it is free to indict a large domestic bank because the Credit Suisse guilty plea did not cause that bank to collapse. But he raised concerns that a U.S. bank may not be able to survive a criminal conviction.

"Customers would have to decide if the potential compliance hurdles of dealing with a criminal enterprise are worth the benefits, while those with fiduciary responsibilities might be forced to switch banks. And many local, state and federal agencies may be unable to do business with an entity with a criminal conviction. Either way, this would be a big cloud over the bank," he said.

Tags: AG Holder | Arthur Andersen | bankruptcy | Better Markets | Credit Suisse Group | Dennis Kelleher | Department of Labor | DOJ | Drexel Burnham | Elizabeth Warren | Eric Holder | felony light | SEC | tax evasion | The Fed | The Federal Reserve

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Ronald Orol

Senior Editor, Financial Regulation

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