Updated September 2 at 8:02am

This Fed tells Wall Street nobody is too big to jail

Guest Column:
William D. Cohan
Preet Bharara’s March 31 speech was little noticed outside a small gathering of legal and compliance executives in Manhattan. He delivered it on the day Wall Street and the financial news media were obsessing over the contention in Michael Lewis’ latest book that high-frequency traders have “rigged” the stock market.

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OP-ED / LETTERS TO THE EDITOR

This Fed tells Wall Street nobody is too big to jail

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Preet Bharara’s March 31 speech was little noticed outside a small gathering of legal and compliance executives in Manhattan. He delivered it on the day Wall Street and the financial news media were obsessing over the contention in Michael Lewis’ latest book that high-frequency traders have “rigged” the stock market.

In the speech, Bharara, the U.S. attorney for the Southern District of New York, gave his usual defense of the Justice Department’s strategy of settling cases with the big Wall Street banks instead of seeking criminal indictments.

Yet he also did something much rarer: He challenged the banks and their leaders to stop whining, fix their cultures, and begin a much-needed overhaul of how bankers, traders and executives get paid on Wall Street.

Bharara, a prosecutor who seems tailor-made for higher political office, has given many speeches since he took the job in 2010. In them, he usually extols his office’s enviable record of winning insider-trading cases – 80 and counting – and deflects criticism for failing to prosecute senior Wall Street bankers for their roles in the financial crisis.

His explanation for the dearth of prosecutions usually takes the form of: It’s not for a lack of trying but rather because of a lack of convincing evidence, which, by the way, we have seen and you have not. So trust us to do the right thing.

He did a little of that old song-and-dance at last week’s Securities Industry and Financial Markets Association forum: “Anyone who blithely opines that there is no deterrent – or other – value in holding institutions, as well as individuals, accountable is just plain wrong and may not fully understand how the world works. It makes a difference, and we have seen it make a difference.”

For the first time, however, Bharara also said that, in the aftermath of the 2002 indictment of Enron Corp.’s accounting firm, Arthur Andersen (which put the firm out of business), “the pendulum has swung too far” away from corporate indictments “and needs to swing back a bit.” He predicted, tantalizingly, that soon enough, a “significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it.”

Although Bharara did not elaborate on the institution or the timing, his threat sounded pretty ominous. He further elaborated on his belief that no Wall Street bank is “too big to jail,” a claim for which Justice Department officials have been roundly criticized. “No one should receive a get-out-of-jail-free card based on size,” Bharara continued. “There may be, at the end of the day, extremely compelling reasons why for the sake of innocent third parties a disposition short of a criminal charge is appropriate in some particular case, but there should never be a presumption of immunity based on size. That is a dangerous thing. We should not be adding a presumption of prosecutorial immunity to the mix of moral hazards.”

He also was pointed in his critique of Wall Street executives and their lawyers, who relentlessly argue that “if we take any criminal action” against their banks, “the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”

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