As U.S. Justice Department prosecutors angle to bring the first criminal charges against global banks since the financial crisis, they’ll have to stare down warnings of uncontainable collateral damage.
The 2002 collapse of Arthur Andersen, the accounting firm indicted in the Enron scandal, “should be a lesson” for prosecutors, Brad Hintz, an analyst at Sanford C. Bernstein & Co., said Thursday in an interview on Bloomberg Television. “Don’t play with matches.”
Stung by lawmakers’ criticism that multibillion-dollar settlements have done too little to punish Wall Street in the wake of the financial crisis, prosecutors are considering indictments in probes of Credit Suisse Group AG and BNP Paribas SA, a person familiar with the matter said. Even after talking with financial regulators about ways to mitigate damage — such as ensuring banks keep charters — prosecutors might not fully understand consequences for the market, according to industry lawyers and bankers who are following the case.
Bank clients — including trustees, fiduciaries and pension funds — could be forced to cut ties with a financial institution labeled a criminal enterprise, the lawyers and bankers said, asking not to be named because they weren’t authorized to talk publicly. Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman Brothers Holdings Inc.’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses.
Criminal action would have to be handled so that any review of a bank’s charter wouldn’t spook customers or revoke a firm’s license, said Gil Schwartz, a partner at Schwartz & Ballen LLP and a former Federal Reserve lawyer.
“The mere threat of requiring a hearing could cause customers to lose confidence in the institution and could cause a run on the bank,” Schwartz said.
The warnings show the resistance prosecutors face in seeking to prove global banks aren’t too big and systemically important to indict. Preet Bharara, the U.S. attorney for the Southern District of New York, signaled in a March speech that a large financial firm would be charged soon, despite the industry’s bleak predictions of fallout.
“Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”
Credit Suisse has been the target since 2011 of a U.S. criminal probe into whether it helped Americans evade taxes. BNP Paribas has been investigated for possible violations of U.S. sanctions barring business with prohibited countries.
Shares of Zurich-based Credit Suisse fell 0.3 percent yesterday to 27.91 francs after news reports on prosecutors’ deliberations. BNP Paribas dropped 3.2 percent to 54.11 euros. The Paris-based firm said it may need to pay much more than the $1.1 billion it set aside for the U.S. sanctions case.
Spokesmen for both firms declined to comment on the prosecutors’ considerations.
There are a variety of ways for prosecutors to limit damage from criminal charges. One option would be to force a bank’s subsidiary, rather than the parent company, to enter a guilty plea, said the lawyers and bankers. The Justice Department has gone down that path in settling charges involving the Foreign Corrupt Practices Act, which forbids U.S. companies from bribing foreign officials to win business.