Episode 547: How To Punish A Bank : Planet Money When banks do bad things, the financial cops can fine them or get them to admit guilt. Now, they might try something brand new. Today on the show: how to punish a bank.
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Episode 547: How To Punish A Bank

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Episode 547: How To Punish A Bank

Episode 547: How To Punish A Bank

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As speeches go, it will probably not go down in history. There were no clever jokes, no personal anecdotes, no tears. In fact, there is not a real recording of it, just this one guy who recorded the speech on his cell phone from the back of the room.

This is at a fancy lunch in Washington, D.C. The guy speaking is Benjamin Lawsky, recently profiled in a magazine as the toughest cop on Wall Street.


His actual title is superintendent of financial services for New York State. And what's remarkable about the speech to me is that he's expressing something that we always imagined regulators say to each other in private, but he's saying it in public. He's saying that he's frustrated he can't figure out how to punish banks for all the bad stuff that they do.

CHACE: Stuff like bringing the entire financial system to the brink of disaster. Lawsky takes it off. If it's not foreclosure fraud, then it's money laundering. If it's not money laundering, it's tax evasion. The list goes on and on. He says, quote, "it is like "Groundhog Day" for the regulators."


BENJAMIN LAWSKY: So that begs the question I think for all of us regulators, what are we doing wrong?

KESTENBAUM: As a regulator, he says, what are we doing wrong?

Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.

CHACE: And I'm Zoe Chace.

Today on the show, how do you punish a bank?

KESTENBAUM: One of the biggest banks in the world is right now about to be punished. BNP Paribas, it's a French bank. The financial cops like Lawsky are in the middle of deciding what they're going to do, trying to figure out how to punish a bank in a way that actually makes it change.


CHACE: When you're trying to figure out a punishment, you want it to sting. You want to take away something that actually matters to the guy being punished. In this case, it's not a guy, it's a bank. And the standard way we go about punishing banks - banks are places that handle lots of money - is by taking a bunch of that money away, basically fines. This is the first thing that every regulator and judge tries to do to bring a bank into line.

KESTENBAUM: Recent example - the bank Credit Suisse. Credit Suisse got in big trouble. And unlike during the financial crisis, where banks were messing around with complicated credit default swaps, what Credit Suisse did is easy for anyone to understand and easy to understand why it was wrong. The bank set up secret bank accounts and helped people avoid paying U.S. taxes.

The details are pretty amazing. Senator Carl Levin laid them out in a big congressional hearing about the bank.


CARL LEVIN: We learned of one Swiss banker who met with a U.S. client over breakfast at a U.S. luxury hotel and slipped the client bank account statements in between the pages of a "Sports Illustrated" magazine.

CHACE: The Swiss bankers went to New York galas and Florida golf tournaments to sign up people for secret Swiss bank accounts. There was a special bank at the Zurich airport. So Americans could just fly right in and manage their money and then go home. If a client wanted to take their money out?


LEVIN: One U.S. client told the subcommittee about visiting the bank's main offices in Zurich. The client was ushered into a remotely-controlled elevator with no floor buttons and escorted to a bare room with white walls, all dramatizing the bank's focus on secrecy. And the client always signed a form ordering that the Credit Suisse account statements be immediately shredded.

CHACE: There were something like 20,000 accounts hidden away from the IRS. The consequence for this malfeasance was a fine - 2.6 billion - with a B - dollars.

KESTENBAUM: (Laughter) You say that and, like, you know, when we say 2.6 billion, it's clearly, like, a lot of money, right? I think it's a lot of money. I don't know. Is it a lot of money?

CHACE: It's hard to know in the scheme of banking. And so I asked Matt Levine about this. He's a columnist for Bloomberg. He's a former banker. He says, yeah, that's a big fine.

MATT LEVINE: Two-point-six billion dollars is a big number. It's basically equal to Credit Suisse's net income for all of 2013. So, you know, it's a pretty meaningful fine.

If you're a person at this bank, if you're, you know, in charge of the business and you told your shareholders that you made $2.5 billion last year. And then you come to them and say, you know what, we're kidding. We made nothing last year because the government took all of it away. Like, think that's a bad year, right? Like, that's not a bad day. That's, like, a bad year. So it is a big deal for them.

CHACE: Did it cause, though, the shareholders of the bank to just be like, hey, like, never mind, we're not making any money here off this business, so peace out. Did that happen?

LEVINE: (Laughter) No, not at all, really.

CHACE: No one really freaked out because fines, they happen all the time now in banking. It's normal now. Your competitors are probably paying off something for some mess they got into themselves.

LEVINE: I sometimes joke that Bank of America pays a $10 billion mortgage fine every couple of weeks. That's not quite true, but they have had a lot.

KESTENBAUM: So that's approach number one to punishing a bank - fines. You can see why the Wall Street cops have been looking to do something more. Hence, tactic number two, which I'm going to call guilty, guilty, guilty.

CHACE: When a bank gets fined, a lot of times that's it. That is the end of that little episode. They don't have to admit that they actually did anything wrong.

So recently, the Justice Department has been trying something new, trying to get the bank to - along with paying this fine - admit guilt. Make the bank say I am a criminal - an institution-wide confession.

KESTENBAUM: Branded for all time - shame. This happened to Credit Suisse. It was big news, a bank admitting it broke the law. Though when you actually hear the mea culpa, it's a little less satisfying.

Here's Brady Dougan in front of Senator Levin. Dougan was CEO of Credit Suisse when a lot of the shenanigans were going on. He's still CEO.


BRADY DOUGAN: Credit Suisse's management team regrets very deeply that despite the industry-leading compliance measures we put in place, we had some Swiss-based private bankers who appear to have violated U.S. law.

KESTENBAUM: That is an awesomely-crafted sentence. He's admitting they did something wrong, but also working in that they had industry-leading compliance measures in place.

CHACE: It's a kind of defensive I'm sorry.


DOUGAN: While I'm extremely dismayed by their conduct, Mr. Chairman, I also believe that leadership requires facing up to the past and taking responsibility for what our employees did.

KESTENBAUM: Matt Levine, the columnist for Bloomberg, says this approach - approach number two for punishing a bank, admitting guilt - also not so effective.

LEVINE: And, you know, people have asked Credit Suisse's executives ever since they pled guilty, you know, are you losing any clients? And the answer is no, everything's fine. We're doing great.

KESTENBAUM: So fines? Eh. Guilty plea? You get a CEO reading some statement probably written by lawyers, which is why regulators are now considering a third approach, one that hasn't been tried before, though it's a trick that every parent knows - the timeout.

CHACE: We do this with kids. If you hit your brother with a toy, you don't get to play anymore.

KESTENBAUM: Specifically, if you hit your brother with a Thomas the Tank Engine train, we take the Thomas the Tank Engine train away, though not that I speak from experience. We also do this with criminals. Seriously, like, if you're put in jail for computer hacking, sometimes part of the punishment is that you can't use a computer when you get out of jail.

CHACE: In this case, the bank wouldn't be allowed to access part of the U.S. financial system. Lawsky, the New York regulator who was getting tough at the luncheon, he suggested doing this with BNP, the big French bank that just got in trouble. The bank's in trouble for doing wire transfers to countries that were on the U.S. sanctions list - Sudan, Iran and Cuba. So Lawsky is proposing taking away one of the tools that allows them to do that.

KESTENBAUM: The bank would be banned from something called dollar clearing. Basically, when U.S. dollars get sent electronically from one place to another, they have to go through this clearinghouse in New York. All the biggest banks are members, and BNP would be thrown out of a club.

CHACE: That is a big deal because sending dollars around the world is what big banks do. I talked to this one banker at Wells Fargo. He does this all the time. Recently, he had a French wine exporter who wanted to buy oak for his oak barrels from Chile. That transaction, it turns out, is all done in U.S. dollars. Those dollars go through New York City.

KESTENBAUM: This is a clever idea for a way to punish a bank. And you can tell that it stings because the French - remember, this is a French bank - the French are really upset about it.

PIERRE LELLOUCHE: What I find totally unacceptable is the fact that using - by simply using the dollar, then American legislation become extraterritorial and essentially gives American judges a right to punish any company anywhere. This is what shocks me.

CHACE: This is Pierre Lellouche, member of the French parliament, former trade minister under Sarkozy. And according to The New York Times, French government officials are getting involved on behalf of their bank. They are flying over here, pleading on the bank's behalf. This big French bank is the headline of every French newspaper. Everyone in France is talking about this.

KESTENBAUM: So finally, a punishment that has people yelling. In fact, the problem with this approach may be that it is too much punishment. The French are arguing that if you shut the bank out of dollar clearing - that coupled with the huge fine that's now on the table, you could really cripple or even kill the bank. Matt Levine at Bloomberg says it's not clear things would be that bad. But he says you do have to worry about it.

LEVINE: Nobody quite knows what the effect on the financial system would be if a really big bank was put out of business.

CHACE: Except for that time when that really big bank went out of business, Lehman Brothers. And then now everybody says that that was the worst thing that ever happened.

LEVINE: It was, and I think Lehman - I mean, I think that the difference between Lehman Brothers and J.P. Morgan or even probably Credit Suisse is really, really stark. And I think putting a really big universal bank out of business would be a whole lot worse than putting a big but not that big investment bank out of business.

CHACE: It's unclear what's going to happen with BNP, unclear if this new form of punishment is actually going to get tested. But we'll probably find out in the next week or so. Matt says as a former banker, the real problem here is that you're trying to punish a thing. Banks don't have feelings. Banks don't experience shame or guilt. Banks, in the end, don't make decisions. People do. That's why, actually, Benjamin Lawsky has also pushed for firing some of the executives at BNP. It's unclear if that's going to happen either. Matt says the most effective approach when you're trying to punish a bad bank would be to send lots of people to jail. Bankers. That option hasn't really been tried yet.


DINAH WASHINGTON: (Singing) What can I say, dear, after I say I'm sorry? What can I do...

CHACE: That's our show. Of course, we want to hear from you. Send us an email - planetmoney@npr.org.

KESTENBAUM: You can also leave comments at nprlistens.org.

CHACE: And we have something very exciting to tell you, something that we at PLANET MONEY have been waiting for for nine months that just happened this week, which is the birth of Piper Yang (ph). This is the first daughter of Caitlin Kenney.

KESTENBAUM: She's so cute.

CHACE: She is so cute, and we are so excited.

KESTENBAUM: Can't wait to meet her.

CHACE: Our show is produced today by Phia Bennin and Viet Le. I'm Zoe Chace.

KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.


WASHINGTON: (Singing) Why should I take somebody like you and chain you? I know that I made you cry, but I'm so sorry, dear. What can I say, dear, after I say I'm sorry?

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