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Editorial: Too Big to Indict; Banks Acquire Impunity Through Size

Too Big to Fail, the bitter banking epithet of the bailout years, found its mirror this week in New York, where HSBC, the London-based banking giant, agreed to pay $1.9 billion to settle a money-laundering complaint.

As the amount of the penalty indicates, this was no technical violation of the rules. The bank was accused not only of defying U.S. sanctions by transferring money on behalf of Iran, but also of helping Mexican drug cartels launder money and of moving tainted money for Saudi Arabian banks that had ties to terrorist organizations. How’s that for a trifecta of world troublemakers?

Anyway, HSBC escaped a criminal indictment because, The New York Times reports, prosecutors and regulators were concerned that it would amount to a death sentence for the bank and ultimately destabilize the entire global financial system. Sound familiar?

As with Too Big to Fail (TBtF), Too Big to Indict (TBtI) encourages risky behavior on the part of banks. The threat of criminal prosecution, as opposed to financial penalties, provides a powerful disincentive to engage in this sort of sordid business. But if big banks conclude that not only will the taxpayers bail them out when they make bad bets with other people’s money, but that they also have immunity from criminal prosecution, well, then it’s the Wild West on Wall Street.

Yes, as part of the settlement, HSBC agreed to tighten internal controls and keep its corporate nose clean for five years, or prosecutors can move to indict. Lanny A. Breuer, head of the Justice Department’s criminal division, defended the decision to not to seek an indictment, calling the record settlement “a very just, very real and very powerful result.”

Not to quibble, but that settlement does not hold any individual accountable for the bank’s actions, and it is hard to imagine that somebody in authority didn’t know what was going on in a money-laundering operation that ran into the billions of dollars. Moreover, although the penalty is vast, global banks are far vaster and the risk here is that if financial penalties are the only sanction on the table, they become, as other commentators have pointed out, just another cost of doing business.

On the other hand, no one could blame prosecutors for fearing that bringing a criminal indictment might sink not only HSBC but also threaten to topple the financial system, much as the Lehman Brothers failure did four years ago. The size of the banks and interconnnectedness of the system make this a credible threat.

There is a solution at hand, one that has been floated since the early days of the financial crisis. If a bank is TBtF and therefore TBtI, then it is TBtE (Too Big to Exist). Breaking up the big banks is not exactly a radical notion. It has been embraced by, among others, Neil Barofsky, the former inspector general of the Troubled Assets Relief Program, aka the bailout; conservative columnist George Will; Sandy Weill, former chairman and CEO of Citigroup; and Richard Fisher, president of the Federal Reserve Bank of Dallas. Because Washington currently lacks the political will to take on Wall Street in such a fundamental way, breaking up the biggest banks is an idea whose time probably has not yet come. But a few more transgressions like those of HSBC ought to hasten the day of its arrival.