[corp-focus] The Beginning of the End of Too-Big-to-Fail
Thu, 28 Mar 2013 09:26:40 -0500
The Beginning of the End of Too-Big-to-Fail
By Robert Weissman
March 28, 2013
A funny thing, wonderful in its own small way, happened last week.
Amidst an endless series of votes on amendments to a federal budget bill, t=
he United States Senate voted 99-0 in favor of an amendment to end subsidie=
s to too-big-to-fail financial institutions.
The stated purpose of the amendment, introduced by Senators Sherrod Brown, =
D-Ohio, and David Vitter, R-Louisiana, is to "end 'too big to fail' subsidi=
es or funding advantage for Wall Street mega-banks (over $500 billion in to=
This 99-0 vote is a harbinger of things to come -- if the public keeps ratc=
heting up pressure.=20
Another amendment, introduced by Senator Jeff Merkley, D-Oregon, that would=
facilitate the criminal prosecution of U.S. financial institutions that br=
eak the law, regardless of size, passed by on a voice vote.
It is true that the Brown-Vitter and Merkley amendments were attached to th=
e budget resolution, which does not have the force of law, and that the Sen=
ate and House of Representatives budget resolutions are in any case not goi=
ng to be reconciled into a single resolution that passes both houses.
But that shouldn't cause us to lose sight of the importance of what happene=
d in the Senate last week. No Senator was willing to stand up on behalf of =
the Wall Street behemoths. That's because they feel the growing public dema=
nd for Congress finally to act to break up the big banks. A growing number =
of them, on both sides of the aisle, are so disgusted with Wall Street abus=
es that they now genuinely believe in the need to address the too-big-to-fa=
Too-big-to-fail is shorthand for the idea that the government can't allow g=
iant banks to fail, no matter what they do or how insolvent they may be, be=
cause their size and interconnectedness with other financial institutions m=
eans failure will have a domino effect that will imperil the entire financi=
In recent months, it has become apparent that too-big-to-fail has morphed i=
nto too-big-to-jail: That fear of damaging the overall financial system is =
inhibiting prosecutors from criminal prosecuting the giant banks, no matter=
how egregious their wrongdoing.
The poster child for too-big-to-jail is HSBC. In December, the banking goli=
ath agreed to pay more than $1 billion in fines and entered into a deferred=
prosecution agreement for anti-money laundering and sanctions violations. =
(Under a deferred prosecution agreement, the government agrees not to prose=
cute a company for criminal violations, so long as the targeted company car=
ries out agreed upon reforms and does not repeat its violations of the law.=
) Then-Assistant Attorney General Lanny Breuer said the company was guilty =
of "stunning failures of oversight -- and worse" and that the "record of dy=
sfunction that prevailed at HSBC for many years was astonishing."
Breuer was correct.
The statement of facts attached to the deferred prosecution agreement with =
HSBC is startling. Just two illustrative examples:
As regards money laundering for Latin American drug cartels, "Senior busine=
ss executives at HSBC Mexico repeatedly overruled recommendations from its =
own AML [anti-money laundering] committee to close accounts with documented=
suspicious activity. In July 2007, a senior compliance officer at HSBC Gro=
up told HSBC Mexico's Chief Compliance Officer that '[t]he AML committee ju=
st can't keep rubber-stamping unacceptable risks merely because someone on =
the business side writes a nice letter. It needs to take a firmer stand. It=
needs some cojones. We have seen this movie before, and it ends badly.'"
As regards efforts to facilitate evasion of U.S. government sanctions again=
st other countries, the statement of facts says, "[B]eginning in the 1990s,=
HSBC Bank plc ("HSBC Europe"), a wholly owned subsidiary of HSBC Group, de=
vised a procedure whereby the Sanctioned Entities put a cautionary note in =
their SWIFT payment messages including, among others, 'care sanctioned coun=
try,' 'do not mention our name in NY,' or 'do not mention Iran.' Payments w=
ith these cautionary notes automatically fell into what HSBC Europe termed =
a 'repair queue' where HSBC Europe employees manually removed all reference=
s to the Sanctioned Entities. The payments were then sent to HSBC Bank USA =
and other financial institutions in the United States without reference to =
the Sanctioned Entities, ensuring that the payments would be processed with=
out delay and not be blocked or rejected and referred to OFAC. HSBC Group w=
as aware of this practice."
Perhaps we've grown cynical, but while it's outrageous, it doesn't seem com=
pletely surprising that companies that systematically violated the law in w=
ays that led to the crashing of the economy and the displacement of million=
s from their homes would escape criminal prosecution.
However, one might still expect criminal prosecution of a bank that facilit=
ated narco-trafficker money laundering on a massive scale, and that aided c=
ountries the United States treats as enemies.
You might think that, but you'd be wrong.
Why did a company engaging in such egregious practices, which facilitated i=
llegal drug trafficking and evasion of U.S. sanctions against foreign count=
ries, escape without a criminal prosecution?
According to Breuer, the worry was that a criminal prosecution of a giant b=
ank like HSBC might bring down the company and threaten the global financia=
l system's stability.
A smaller bank, presumably, would have received no such deferential treatme=
In other words, the mere fact of its excessive size enabled HSBC to escape =
criminal penalties; it has been judged too big to jail.
But HSBC is not off the hook just yet. Other governmental agencies have the=
power to impose real sanctions on the company, if they choose.
At the end of January, Public Citizen asked the Federal Deposit Insurance C=
orporation to revoke HSBC's depository insurance, based on FDIC's authority=
to terminate insurance where a banking institution has engaged in "unsound=
practices" or "violated any applicable law."
We also asked the Maryland Attorney General to strip HSBC of its operating =
charter (the company's U.S. subsidiary is chartered in Maryland), based on =
authority to take away the charter for a company engaged in a conspiracy "t=
o engage in criminal activity as a significant source of income," or where =
the corporation's activities serve to "aid, or abet the violation of crimin=
al laws relating to ... illegal drug distribution."
More than 38,000 people have joined the call on the Maryland Attorney Gener=
al to strip HSBC's charter. You can, too:
The Dodd-Frank Wall Street Reform and Consumer Protection Act did many impo=
rtant, positive things, but it did not adequately grapple with the problem =
of oversized Wall Street banks. The Senate's 99-0 vote on the Brown-Vitter =
amendment and passage of the Merkley amendment heralds what's to come. This=
is our time to make real change.
Robert Weissman is president of Public Citizen, <www.citizen.org>.
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