Too Big To Jail
Too Big To Fail has struck again. This time, instead of a taxpayer-funded bailout, it’s avoidance of prison time for criminal activities. As former Troubled Asset Relief Program (TARP) Inspector General Neil Barofsky said in a The New Republic (TNR) op-ed (emphasis added):
Some perspective: HSBC sent more than $800 million in bulk cash from Mexico to the United States, a good chunk of which apparently represented proceeds from some of the most notorious Colombian drug cartels. As someone who tried the first narcotics money laundering case involving extradition from Colombia, let me assure you that this is a lot of money, the discovery of which usually generates vigorous prosecutions and lengthy prison sentences. And it wasn’t HSBC’s only dirty business: There were also hundreds of millions of more dollars of illegally disguised transactions with rogue nations such as Iran and Sudan.
Why no criminal charges? Why instead only some remedial measures and a “historical” fine that can be measured in weeks — not years — of earnings? It certainly wasn’t for lack of evidence. No, instead the government determined that HSBC is not only too big to fail, but also too big to jail. As the New York Times first reported, even though there were strong voices within DOJ pushing for criminal charges, the big banks’ best friends within the government (the Treasury Department, of course, and other unnamed regulators) were too fearful that an indictment could destabilize the global financial system. Yes, it’s 2008 all over again. In the name of systemic stability, a megabank again escapes accountability for its actions, rescued by compliant officials.
In 2008, the Troubled Asset Relief Program (TARP) passed through Congress and was signed by President Bush. The program, which essentially became a slush fund for a variety of special interest bailouts, has been praised by the Washington establishment for allegedly preventing a full collapse of the American economy. The 18-month recession, three-and-a-half years of anemic recovery, and massive unemployment was a small price to pay, at least inside the Beltway Bubble. Keeping insolvent banks afloat was more important!
Washington points to various Congressional Budget Office (CBO) reports showing taxpayers would have made a profit if only banks had received bailouts. According to the latest assessment by CBO, taxpayers are expected to lose $24 billion out of $431 billion that went out the door. CBO reports that the losses can be attributed to “costs for assistance to American International Group (AIG), assistance to the automotive industry, and grant programs aimed at avoiding home foreclosures.” In other words, the government would have made a profit if it kept TARP within its original boundaries. It clearly failed to do so, showing once again the inept and corrupt nature of the federal government.
In his book “Bailout,” which came out earlier this year, Barofsky explained how the alleged success of TARP at keeping America out of a full Depression is more than made up for by making Too Big to Fail official policy of the United States federal government. A 2008 donor to the Obama campaign, he hammers bureaucrats at the Treasury and other federal agencies for working to benefit banks at the expense of the people. As he pointed out in his column at TNR, the consequences are devastating (emphasis added):
In some aspects, DOJ’s surrender is understandable. Notwithstanding regulatory reform efforts in the U.S. and the UK, the largest banks are in many ways even more systemically dangerous today than when we bailed them out in 2008. This indirect acknowledgment that we have failed to fix the too-big-to-fail problem has potentially dire consequences.
The enduring presumption of bailouts in our banking system already drives the largest banks to take on too much risk with too little disclosure and too much leverage, a toxic cocktail that will inevitably lead to another financial crisis. Yesterday’s action now spikes the punch with a new toxin, confirmation that criminal penalties are off the table, leaving a worst-case scenario of a fine totaling far less than even a single quarter’s earnings. Given the potential profits of criminal behavior and the unlikelihood of personal consequences for the executives directing it, the message is clear: Crime pays. This will inevitably lead to more reckless risk-taking that will further undermine systemic stability and lead to an even greater financial meltdown down the road.
Barofsky’s solution is to have the federal government break up the banks. Rather than increase the size and scope of the failed regulatory bureaucracy, however, Congress could simply stop dragging its feet and allow the best regulator of all – the free market – to step in and break up banks when they fail to self-regulate, as is done to thousands of small businesses every year in America. Bankruptcy law and criminal law, applied equally across the board, will take care of the rest.
The 2008 financial crash was initiated by collusion between Big Government and Big Business. Clearly, this collusion is still prevalent, to the detriment of Main Street.
Update: On December 11, 2012 it was announced that the federal government had sold its last shares of AIG, garnering the federal government nearly $23 billion in profit. We don’t know what the final calculation of TARP’s costs or profits will be as of yet, but it does appear that the cost will be lower than the CBO’s October report indicated.