Too-Big-to-Fail Banks Limit Prosecutor Options, Attorney General Eric Holder Says

Story by Bloomberg
Written by Phil Mattingly

The size of the largest financial institutions has made it difficult for the U.S. Justice Department to bring criminal charges when there’s wrongdoing, Attorney General Eric Holder said.

Criminal charges against a bank -- something that could threaten its existence -- may also endanger the national or global economies in the case of the largest ones, because of their size and interconnectedness. That has “made it difficult for us to prosecute” some of those institutions, Holder said today at a Senate Judiciary Committee hearing.

“That is a function of the fact that some of these institutions have become too large,” Holder told lawmakers. “It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.”

U.S. lawmakers, including Massachusetts Senator Elizabeth Warren, a Democrat, have raised concerns that the largest institutions haven’t been held accountable for their actions that played a role in the worst financial crisis since the Great Depression.

While Holder didn’t single out any specific institutions, he said bank size was something Congress would “need to consider.”

‘New Twist’

Holder’s comments on bank size “add a new twist to this debate” about whether action should be taken to downsize the largest financial institutions, Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods Inc., said in a note clients today.

“This will further stoke the debate over breaking up the large banks and will generate negative headlines for the largest US banks,” Gardner wrote.

Holder’s remarks came in response to questions from Senator Charles Grassley, an Iowa Republican who has criticized the Justice Department’s lack of prosecutions against banks.

Grassley and Senator Sherrod Brown, an Ohio Democrat, sent the Justice Department a letter on Jan. 29 asking whether the federal government avoids prosecuting banks that they described as “too big to jail.” The two senators specifically cited the $1.9 billion settlement between the government and HSBC Holdings Plc. (HSBA) to resolve allegations that included money laundering for criminal organizations.

Internal Rules

Judith C. Appelbaum, principal deputy assistant attorney general, defended what she called the department’s “vigorous enforcement against wrongdoing” in a letter to Brown dated Feb. 27. Federal prosecutors must follow internal rules, which include taking into account the economic impact, to assess whether to pursue a criminal case, she said.

The Justice Department remains willing to bring charges against a corporation of any size, she wrote. The Justice Department secured a guilty plea from the Japanese subsidiary of UBS AG in a resolution of allegations that the bank rigged interest rates. A Royal Bank of Scotland Plc subsidiary also pleaded guilty to charges in that bank’s settlement with authorities in the global rate-rigging probe.

Still, Holder said going after individuals remains the best way to halt wrongdoing on Wall Street.

“The greatest deterrent effect is not by the prosecution of any corporation, though that’s important,” he told Grassley. “The greatest deterrent effect is to prosecute the individuals in the corporation who are responsible for those decisions.”