WASHINGTON – Today, as the Senate Banking Committee held a hearing on whether banking regulators have become too close to the banks they oversee, Oregon’s Senator Jeff Merkley grilled the President of the Federal Reserve Bank of New York on whether a lack of individual prosecutions at big banks shows they are still “Too Big To Jail.”
Merkley highlighted the case of Credit Suisse’s tax evasion, in which the bank pled guilty to criminal charges, yet no individuals responsible for the criminal behavior were prosecuted or sent to prison.
“I think ordinary Americans would find it fascinating that this plea agreement, which basically involved a financial penalty, a fine, constitutes somehow ending ‘Too Big To Jail’ if nobody’s going to jail,” Merkley said.
At another point, Merkley questioned whether regulators were “asleep at the switch,” given that the tax evasion was brought to light by a Senate investigation and not by the regulators who are tasked with overseeing the banks on a day-to-day basis.
A video clip from the exchange can be accessed here. The full transcript of the exchange follows below.
MERKLEY: Well, thank you very much, Mr. Chair.
And Mr. Dudley, you referred to the Credit Suisse arrangement as ending Too Big To Jail. Credit Suisse was involved in an operation that involved creating secret off-shore accounts in the names of sham entities and foundations.
How many of the names of the Americans who were involved in creating those accounts were turned over as part of that criminal prosecution?
DUDLEY: I don’t know the answer to that, Senator.
MERKLEY: You don’t know the answer to that?
MERKLEY: Well, the answer is none. And can you explain why that is?
DUDLEY: I can’t explain how — why that is, Senator.
MERKLEY: That’s just a fundamental fact of that case that you’re presenting as Too Big To Jail. How many of the Americans who created these secret accounts were prosecuted?
DUDLEY: I don’t know, Senator.
MERKLEY: Well, the answer’s none because no names were turned over.
The — did the information related to that prosecution, which you said shows the Fed is now involved in ending Too Big To Jail, did the information come from the Fed that led to that prosecution?
DUDLEY: I don’t know, Senator.
MERKLEY: It’s hard to imagine since the casual reader of the newspaper would know that it came from Senator Levin’s hearings and the report that his committee put out that had extensive disclosure that led to this investigation.
So, the basic information on that case is that hundreds of Credit Suisse employees were involved in the scheme to create these secret offshore accounts in the name of sham entities. So if we’ve ended too-big-to-jail, how many of those hundreds of the Credit Suisse employees have been indicted for criminal activity?
DUDLEY: I don’t know the answer to that.
MERKLEY: Would you be surprised if the answer is zero?
DUDLEY: Probably. I’d be surprised.
MERKLEY: Well, I find it fascinating that you’re presenting this as the end of too-big-to-jail. How many people are actually in jail right now because of that investigation?
DUDLEY: It’s end of too-big-to-jail for the corporation which pled guilty — the corporation pled guilty…
MERKLEY: You don’t put corporations in jail.
DUDLEY: There was no — the argument that was made a year ago or a year-and-a-half ago was that large financial institutions could not plead guilty to crimes because this could destabilize those institutions, which could lead to problems. And the view was that was unfair because the view was why should these entities be too big to jail. Why should they be able to escape guilty pleas because of their size?
And I think we’ve actually set a new precedent over the last year where no bank is too big to be found guilty if they commit — if they’ve committed a crime.
MERKLEY: OK, but that doesn’t involve jail. Jail involves putting people in jail. I just — I think ordinary Americans would find it fascinating that this plea agreement, which basically involved a financial payment, a fine, constitutes somehow ending Too Big To Jail if nobody’s going to jail.
There may have been some folks go to jail. There were some eight folks three years earlier who were indicted. I don’t know the outcome of those cases. But that would be a small touch on this. And the — I just think it — isn’t it ironic that it took a U.S. Senate investigation by Carl Levin to provide the facts that led to this particular case getting handled?
DUDLEY: I don’t have a good way of judging that.
MERKLEY: But you’re the regulator. Shouldn’t the regulator have discovered these facts? Why did it take the U.S. Senate committee to find out the facts? If you’re the regulator, why didn’t the regulator find out these facts?
DUDLEY: I don’t know the answer.
MERKLEY: Doesn’t this indicate you’re just asleep at the switch?
DUDLEY: I don’t — I don’t agree with that characterization.
MERKLEY: Well, then why didn’t you find out these issues? If the U.S. Senate committee, long — far removed, could find out this information and you have all kinds of people daily reviewing activities, how is it possible you could fail to see the information that the U.S. Senate committee came up with?
Does this disturb you? Do you think there needs to be some change in practices? You presented a very glib presentation of everything being wonderful. But doesn’t this set of facts say that maybe there’s need for some fundamental reform?
DUDLEY: We — Senator, we’re continuing to try to see how we can do our job better. But I think especially for foreign institutions where we only have insight into the U.S. entity, it’s very hard to know what’s happening globally. So I would say…
MERKLEY: … activities of the U.S. entity — is that really an excuse? That it’s — I mean, this is a U.S. subsidiary of the foreign entity. Is that really an excuse? I mean, if the U.S. Senate can find out the activities of a U.S. subsidiary, can’t your regulators who are there on a daily basis find out?
DUDLEY: Senator, I think that when we focus on supervision, our orientation is towards safety and soundness of the firms that we supervise and the financial stability of the global financial system. I don’t think that we have spent — ever spent a tremendous amount of resources on issues of tax evasion.
MERKLEY: Are you familiar with the settlement involved granting Credit Suisse an exemption from federal law that requires a bank to hand over its investment adviser license?
DUDLEY: I believe that they were granted an exemption.
MERKLEY: OK. Well, it might be an appropriate part of the story to present. And also that the plea agreement was deliberately announced when the markets were closed. There was an awful gentle touch in even how this plea agreement was handled. And I just want to have a coherent picture for the public to see those are parts of the story. I’ll conclude there. Thank you.