It is a little hard to believe, but it was only a year ago that we were talking about whether a criminal indictment of a big bank would cause the collapse of that bank, or even of the broader financial system. Here’s a paragraph from Bloomberg News, dated last May, that sums up what a lot of people were thinking:
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.
The U.S. Justice Department is pressing to reach currency-rigging settlements on Wednesday that will include guilty pleas from five banks — one more than previously reported — according to two people with knowledge of the situation.
The fifth bank is Zurich-based UBS Group AG, one of the people said, asking not to be identified because the matter hasn’t been made public. The other four — Citigroup Inc., JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc — will plead guilty to antitrust charges, people familiar with the matter have previously said.
Throw in Deutsche Bank’s Libor guilty plea last month and you’ve got a pretty good sample of the biggest international banks. If you think twice before entering into billion-dollar transactions with such firms, by my count you’ll have to think 16 times before, I mean, you’re going to end up doing your billion-dollar transaction with one of them, right? There are still a few big banks without recent criminal convictions that might be able to take your billion-dollar transaction, but the pickings are getting slim.1 In the space of just over a year, a criminal conviction has become the norm, not the exception.
Which probably means that it’s less scary for banks than it used to be? Not just because the stigma with clients and counterparties seems to be gone, as familiarity has bred a distinct lack of contempt, but also because the official consequences of a criminal conviction are less damaging than everyone thought they would be. In theory, there are lots of collateral penalties for banks convicted of crimes. In practice, if you take those collateral consequences literally, and apply them to every bank, then you mess with the banking system in a way that no regulator really wants. So negotiating a waiver of those consequences is just part of the deal:
Banks entering guilty pleas also need to receive permission from the Securities and Exchange Commission to prevent the criminal cases from triggering penalties that would disqualify them from other businesses, including managing mutual funds.
Bank executives have said guilty pleas could topple their operations if they don’t first receive such waivers.
They can’t plead guilty until they know it won’t hurt too much. 2 This is of course controversial. We talked the other day about WKSI waivers, in which the SEC lets banks continue to issue securities quickly even after criminal convictions that theoretically disqualify them from “well-known seasoned issuer” status. SEC Commissioner Kara Stein dissented from Deutsche Bank’s waiver, saying that Deutsche’s actions were “a complete criminal fraud upon the worldwide marketplace.” Same, though, for all the FX-rigging banks. What, is the SEC going to declare that all of the big banks are no longer WKSIs, and all their securities offerings have to go through SEC review? JPMorgan filed 11 prospectuses for securities offerings last Friday, and 18 Thursday, and 16 the day before.3 Surely the SEC has better things to do than read all of them.4 None of them have anything to do with the FX (or Libor) manipulation, and it’s hard to see how investors would be helped by slowing these offerings down.