Skip to main content

Are banks too big to jail?

By Mark Calabria and Lisa Gilbert
updated 1:35 PM EST, Mon January 6, 2014
STORY HIGHLIGHTS
  • Authors: Federal prosecutors declined to indict HSBC for wrongdoing a year ago
  • They say Eric Holder has signaled concern about effects if a large bank were charged
  • We can't have one law for small companies and another for big ones, they say
  • Authors: Justice Department owes public an explanation of "too big to jail" standards

Editor's note: Mark Calabria is director of Financial Regulation Studies at The Cato Institute. Lisa Gilbert is director of Public Citizen's Congress Watch division.

(CNN) -- A libertarian from The Cato Institute and a progressive from Public Citizen may not often agree on politics or what the proper role of government should be, but we agree the public has been kept in the dark on the "too big to jail" issue for too long.

Just over a year ago, many were stunned when the Department of Justice decided not to indict HSBC, headquartered in London an one of the world's largest banks. The Justice Department made this decision despite the fact that the bank willfully failed to comply with anti-money laundering laws.

HSBC's criminal activities seemed to most observers to provide a strong case for the government. These activities included permitting narcotics traffickers to launder hundreds of millions of dollars of drug proceeds through HBSC subsidiaries. It also facilitated hundreds of millions of dollars in transactions on behalf of customers in countries that are sanctioned by the United States: Cuba, Iran, Libya, Sudan and Myanmar (formerly known as Burma).

Mark Calabria
Mark Calabria
Lisa Gilbert
Lisa Gilbert

But instead of charging HSBC, the Justice Department entered into a deferred prosecution agreement. Under its terms, the government agreed not to prosecute the company for its actions in exchange for HSBC acknowledging wrongdoing, paying a fine and agreeing to cooperate with the government and remedy its compliance programs. The back's CEO issued a statement accepting responsibility and saying: "The HSBC of today is a fundamentally different organisation from the one that made those mistakes."

One can question the wisdom of our drug war and whether banks should be drafted into law enforcement duties, but those policy questions do not change a bank's duty to comply with the law.

In a Senate Judiciary Committee hearing after the settlement, U.S. Sen. Charles Grassley, R-Iowa, asked Attorney General Eric Holder why the government chose not to indict HSBC.

Holder responded by saying he was not talking about HSBC in particular but that, "I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy."

From Holder's statements, it appears that the government was so worried about the dangerous repercussions that could result from prosecuting such a large, complex and globally significant institution that it shielded HSBC from criminal liability.

In a subsequent House Financial Services Oversight and Investigations Subcommittee hearing that examined the "too big to jail" problem, members of Congress asked repeatedly how the Justice Department decides which financial institutions are "too big to jail" and what information it relies upon to make those decisions. The witness, Acting Assistant Attorney General Mythili Raman, was evasive, and left Congress and the public without answers.

Now, over a year after the HSBC settlement, those questions still loom. Justice has yet to explain its policy and practice concerning the prosecution -- or refusal to prosecute -- large, complex financial institutions.

Without clear answers about how the Justice Department decides which financial institutions are "too big to jail" and what information it relies upon to make those decisions, we are left to wonder about the extent to which the department might be undermining its mission to enforce the law and ensure fair and impartial administration of justice.

If it bases enforcement actions on a bank's size and economic significance, the Justice Department would be taking on the role of financial regulator.

While we may not agree on the wisdom of allowing bank regulators to designate certain entities as "systemic," congressional intent is clear that such a decision is the purview not of Justice but of the Financial Stability Oversight Council. We have yet to see any evidence that the department conferred with the Oversight Council or any financial regulator in determining whether HSBC, or any other institution, was indeed "systemic."

Were the Justice Department to maintain a policy of basing enforcement decisions upon an entity's perceived impact on the national economy, one result would be to further entrench "too big to fail." Such an arrangement would allow these favored companies to borrow at subsidized rates and to capture market-share from smaller competitors, ultimately making these same "too-big-to-fail" companies even bigger.

"Equality under the law" demands that companies are treated similarly under the law, regardless of their size. There cannot be a separate justice system for the large and another system for the small. If certain institutions are being provided preferential treatment under the law, then the Justice Department should publicly acknowledge that that is the case, as well as its reasoning for doing so.

After passing the one-year mark, we hope that our policymakers reflect on this unresolved issue and respond appropriately. The public deserves no less.

Follow us on Twitter @CNNOpinion.

Join us on Facebook.com/CNNOpinion.

The opinions expressed in this commentary are solely those of the authors.

ADVERTISEMENT
Part of complete coverage on
updated 12:48 PM EDT, Tue October 21, 2014
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
updated 9:02 PM EDT, Mon October 20, 2014
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
updated 12:00 PM EDT, Tue October 21, 2014
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
updated 7:35 AM EDT, Tue October 21, 2014
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
updated 9:12 AM EDT, Tue October 21, 2014
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
updated 8:37 AM EDT, Tue October 21, 2014
Crystal Wright says racist remarks like those made by black Republican actress Stacey Dash do nothing to get blacks to join the GOP
updated 11:42 AM EDT, Tue October 21, 2014
Mel Robbins says by telling her story, Monica Lewinsky offers a lesson in confronting humiliating mistakes while keeping her head held high
updated 9:29 AM EDT, Mon October 20, 2014
Cornell Belcher says the story of the "tea party wave" in 2010 was bogus; it was an election determined by ebbing Democratic turnout
updated 4:12 PM EDT, Mon October 20, 2014
Les Abend says pilots want protocols, preparation and checklists for all contingencies; at the moment, controlling a deadly disease is out of their comfort zone
updated 11:36 PM EDT, Sun October 19, 2014
David Weinberger says an online controversy that snowballed from a misogynist attack by gamers into a culture war is a preview of the way news is handled in a world of hashtag-fueled scandal
updated 8:23 AM EDT, Mon October 20, 2014
Julian Zelizer says Paul Krugman makes some good points in his defense of President Obama but is premature in calling him one of the most successful presidents.
updated 10:21 PM EDT, Sun October 19, 2014
Conservatives can't bash and slash government and then suddenly act surprised if government isn't there when we need it, writes Sally Kohn
updated 8:28 AM EDT, Mon October 20, 2014
ISIS is looking to take over a good chunk of the Middle East -- if not the entire Muslim world, write Peter Bergen and Emily Schneider.
updated 9:00 AM EDT, Mon October 20, 2014
The world's response to Ebola is its own sort of tragedy, writes John Sutter
updated 4:33 PM EDT, Fri October 17, 2014
Hidden away in Russian orphanages are thousands of children with disabilities who aren't orphans, whose harmful treatment has long been hidden from public view, writes Andrea Mazzarino
updated 1:22 PM EDT, Sat October 18, 2014
When you hear "trick or treat" this year, think "nudge," writes John Bare
updated 12:42 AM EDT, Sat October 18, 2014
The more than 200 kidnapped Nigerian schoolgirls have become pawns in a larger drama, writes Richard Joseph.
updated 9:45 AM EDT, Fri October 17, 2014
Peggy Drexler said Amal Alamuddin was accused of buying into the patriarchy when she changed her name to Clooney. But that was her choice.
updated 4:43 PM EDT, Thu October 16, 2014
Ford Vox says the CDC's Thomas Frieden is a good man with a stellar resume who has shown he lacks the unique talents and vision needed to confront the Ebola crisis
updated 4:58 AM EDT, Sat October 18, 2014
How can such a numerically small force as ISIS take control of vast swathes of Syria and Iraq?
updated 9:42 AM EDT, Fri October 17, 2014
How big a threat do foreign fighters in Syria and Iraq pose to the West? It's a question that has been much on the mind of policymakers and commentators.
updated 8:21 AM EDT, Fri October 17, 2014
More than a quarter-million American women served honorably in the Iraq and Afghanistan wars. Now they are home, we have an obligation to help them transition back to civilian life.
updated 4:27 PM EDT, Thu October 16, 2014
Paul Begala says Rick Scott's deeply weird refusal to begin a debate because rival Charlie Crist had a fan under his podium spells disaster for the Florida governor--delighting Crist
updated 12:07 AM EDT, Thu October 16, 2014
The longer we wait to engage on Ebola, the more limited our options will become, says Marco Rubio.
updated 7:53 AM EDT, Wed October 15, 2014
Democratic candidates who run from President Obama in red states where he is unpopular are making a big mistake, says Donna Brazile
updated 12:29 AM EDT, Thu October 16, 2014
At some 7 billion people, the world can sometimes seem like a crowded place. But if the latest estimates are to be believed, then in less than a century it is going to feel even more so -- about 50% more crowded, says Evan Fraser
updated 12:53 PM EDT, Mon October 20, 2014
Paul Callan says the Ebola situation is pointing up the need for better leadership
updated 6:45 PM EDT, Wed October 15, 2014
Nurses are the unsung heroes of the Ebola outbreak. Yet, there are troubling signs we're failing them, says John Sutter
updated 1:00 PM EDT, Wed October 15, 2014
Dean Obeidallah says it's a mistake to give up a business name you've invested energy in, just because of a new terrorist group
updated 7:01 PM EDT, Wed October 15, 2014
Fear of Ebola is contagious, writes Mel Robbins; but it's time to put the disease in perspective
updated 1:44 PM EDT, Tue October 14, 2014
Oliver Kershaw says that if Big Tobacco is given monopoly of e-cigarette products, public health will suffer.
updated 9:35 AM EDT, Sat October 18, 2014
Stop thinking your job will make you happy.
updated 10:08 PM EDT, Tue October 14, 2014
Ruben Navarrette says it's time to deal with another scandal involving the Secret Service — one that leads directly into the White House.
updated 7:25 AM EDT, Tue October 14, 2014
Americans who choose to fight for militant groups or support them are young and likely to be active in jihadist social media, says Peter Bergen
updated 9:03 AM EDT, Mon October 13, 2014
Stephanie Coontz says 11 years ago only one state allowed same sex marriage. Soon, some 60% of Americans will live where gays can marry. How did attitudes change so quickly?
updated 4:04 PM EDT, Tue October 14, 2014
Legalizing assisted suicide seems acceptable when focusing on individuals. But such laws would put many at risk of immense harm, writes Marilyn Golden.
updated 9:07 AM EDT, Mon October 13, 2014
Julian Zelizer says the issues are huge, but both parties are wrestling with problems that alienate voters
updated 6:50 PM EDT, Mon October 13, 2014
Mel Robbins says the town's school chief was right to cancel the season, but that's just the beginning of what needs to be done
updated 11:43 AM EDT, Sat October 11, 2014
He didn't discover that the world was round, David Perry writes. So what did he do?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT