Banking

Principles versus Interests

The website of every large corporation these days has a section labeled Corporate Social Responsibility containing high-minded language about its commitment to sustainability, community development, human rights and the like.

For the most part, these positions serve mainly as a form of corporate image-burnishing and have little real-world applicability. Now, however, a group of large U.S. and foreign banks are being challenged to live up to their CSR principles in connection with one of the most contentious projects of our day: the Dakota Access Pipeline.

Following a recent decision by the Army Corps of Engineers to block the final permit needed to route the pipeline (usually referred to as DAPL) under North Dakota’s Lake Oahe and dangerously closely to the Standing Rock Sioux Reservation, the project is stalled. Yet that could quickly change with the incoming Trump Administration.

Meanwhile, attention has turned to a syndicate of 17 lenders that have committed a $2.5 billion line of credit to the project. Among the leaders of the pack are Citigroup and TD Securities, owned by Canada’s Toronto-Dominion Bank. Of the 17, all but two are endorsers of a CSR document known as the Equator Principles. (The list of endorsers is here; the two members of the syndicate not among them are China’s ICBC Bank and Suntrust Robinson Humphrey.)

The principles were drawn up in 2003 by a group of major banks facing increasing pressure from environmental and human rights groups over their involvement in controversial projects undertaken by mining, petroleum and timber corporations.

In adopting the principles, banks committed to providing loans only to those projects whose sponsors could demonstrate that they would be performed in a “socially responsible” manner and according to “sound environmental principles.” Sponsors were also supposed to conduct assessments that took into consideration issues such as the impact on indigenous communities.

The current version of the Equator Principles states that projects affecting indigenous peoples should include “a process of Informed Consultation and Participation, and will need to comply with the rights and protections for indigenous peoples contained in relevant national law, including those laws implementing host country obligations under international law…Projects with adverse impacts on indigenous people will require their Free, Prior and Informed Consent.”

It is highly questionable that Equity Transfer Partners and the other companies involved in DAPL have met this test. On the contrary, the harsh response of the project sponsors and local law enforcement agencies to the peaceful protests at the site has demonstrated an utter disregard for the concerns of Native water protectors.

It is no surprise that opponents of the pipeline are calling the lenders to task. In November a group of more than 500 civil society organizations from 50 countries issued a joint letter to the 17 lenders citing the Equator Principles and calling on them to suspend their financial support of the project until the concerns of the Standing Rock Sioux Tribe are fully addressed.

So far there is no sign that the lenders are prepared to withdraw their support of the pipeline. This means there will be more clashes ahead — both between police and protestors, and between the profit interests of the lenders and their purported principles.

Criminal Enterprises

Most cases of corporate misconduct are forgotten soon after a fine or settlement is announced, but the Wells Fargo phony account scandal seems to have real staying power. The company had to pay $185 million in penalties. CEO John Stumpf was forced to resign and pay back $41 million in compensation after being lacerated in two Congressional hearings. The city of Chicago and the California Treasurer cut some business ties with the bank.

Now Wells is facing a more serious legal challenge. It’s been reported that California Attorney General Kamala Harris is considering criminal identity theft charges against the bank over the millions of bogus accounts and the related fees that were improperly charged to customers. The AG’s office has demanded that Wells turn over a mountain of documents about accounts created not only in California but also in other states when California employees were involved.

It’s too soon to say for sure, but this case and other potential criminal actions could have a catastrophic effort on Wells. Criminal cases against major banks are rare, and most of those are resolved through deferred prosecution or non-prosecution agreements that allow the corporation to avoid a conviction. An exception came last year when Citicorp, JPMorgan Chase and two foreign banks pleaded guilty to charges of manipulating the foreign exchange market. They had to get special waivers to continue operating in certain areas that normally exclude felons.

The Wells case may do more damage, given the scope of the misconduct and the fact that it involves the bank’s core business. In this way it is comparable to the scandal surrounding Volkswagen and its systematic fraud concerning emissions testing.

These two situations pose a challenging question: What should be done about a large corporation engaged in flagrant misconduct? Another monetary penalty is not going to make much difference. As Violation Tracker shows, even before the recent case Wells had paid out more than $10 billion in fines and settlements in some two dozen cases involving a variety of abuses.

Stumpf’s ouster was an important step, but is there any reason to think that the executives who remain are all that different? A boycott of the company’s services is merited, but it would have to be much bigger in scope to have a real impact.

The usual way that regulators and prosecutors handle criminal enterprises is to force them out of business, but these are usually relatively small operations. What should be done with an institution such as Wells, which has more than 260,000 employees, some 8,600 branches and offices, and 70 million (presumably real) customers?

The answer for dealing with Wells Fargo might be to break it up into a number of smaller companies that are kept under close supervision and barred from operating in riskier areas. In other words: use a variation of Glass-Steagall as a way of discouraging fraudulent behavior. Even better would be if these smaller institutions operated under employee ownership.

My point is that we need to get more creative in dealing with systemic corporate crime so we’re not forced to endure an endless series of scandals.

False Claims and Other Frauds

ViolationTracker_Logo_Development_R3 The False Claims Act sounds like the name of a Donald Trump comedy routine, but it is actually a 150-year-old law that is widely used to prosecute companies and individuals that seek to defraud the federal government. It is also the focus of the latest expansion of Violation Tracker, the database of corporate crime and misconduct we produce at the Corporate Research Project of Good Jobs First. The resource now contains 112,000 entries from 30 federal regulatory agencies and all divisions of the Justice Department. The cases account for some $300 billion in fines and settlements.

Through the addition of some 750 False Claims Act and related cases resolved since the beginning of 2010, we were able to identify the biggest culprits in this category. Drug manufacturers, hospital systems, insurers and other healthcare companies have paid nearly $7 billion in fines and settlements. Banks, led by Wells Fargo, account for the second largest portion of False Claims Act penalties, with more than $3 billion in payments. More than one-third of the 100 largest federal contractors have been defendants in such cases during the seven-year period.

Among the newly added cases involving healthcare companies, the largest is the $784 million settlement the Justice Department reached last April with Pfizer and its subsidiary Wyeth to resolve allegations that they overcharged the Medicaid program. DaVita HealthCare Partners, a leading dialysis provider, was involved in the next two largest cases, in which it had to pay a total of $800 million to resolve allegations that it engaged in wasteful practices and paid referral kickbacks while providing services covered under Medicare and other federal health programs.

Wells Fargo accounts for the largest banking-related penalty and the largest False Claims Act case overall in the new data: a $1.2 billion settlement earlier this year to resolve allegations that the bank falsely certified to the Department of Housing and Urban Development that certain residential home mortgage loans were eligible for Federal Housing Administration insurance, with the result that the government had to pay FHA insurance claims when some of those loans defaulted.

Thirty-five of the 100 largest federal contractors (in FY2015) have paid fines or settlements totaling $1.8 billion in False Claims Act-related cases since the beginning of 2010. The biggest contractor, Lockheed Martin, paid a total of $50 million in four cases, while number two Boeing paid a total of $41 million in two cases.

The database has also added new search features, such as the ability to search by 49 different types of offenses, ranging from mortgage abuses to drug safety violations. Users can view summary pages for each type of offense, showing which parent companies have the most penalties in the category. Penalty summary pages for parents, industries and agencies now also contain tables showing the most common offenses. Users can add one or more offense type to other variables in their searches.

Among types of offenses, the largest penalty total comes from cases involving the packaging and sale of toxic securities in the period leading up to the financial meltdown in 2008. The top-ten primary case types are as follows:

Toxic securities abuses: $68 billion
Environmental violations: $63 billion
Mortgage abuses: $43 billion
Other banking violations: $18 billion
Economic sanction violations: $14 billion
Off-label/unapproved promotion of medical products: $12 billion
False Claims Act cases: $11 billion
Consumer protection violations: $9 billion
Interest rate benchmark manipulation: $7 billion
Foreign Corrupt Practices Act cases: $6 billion

We also added a feature allowing for searches limited to companies linked to parent companies with specific ownership structures such as publicly traded, privately held, joint venture, non-profit and employee-owned. That’s in addition to updating the data from the agencies already covered and increasing the size of the parent company universe to 2,165.

The uproar over the Wells Fargo sham accounts scandal is heightening the discussion of corporate crime. Violation Tracker hopes to be a tool in efforts to turn that discussion into lasting change.

Grandstanding Without Results

Members of Congress subjected the CEOs of a pair of rogue corporations to much-deserved castigation in recent days, but the executives will probably turn out to be the victors. John Stumpf of Wells Fargo and Heather Bresch of Mylan endured the barbs knowing that they will not lead to any serious consequences.

The periodic grilling of business moguls amid corporate scandals is a longstanding feature of Congressional oversight. In the 1930s the Senate Banking Committee, led by investigator Ferdinand Pecora, questioned Wall Street titans such as J.P. Morgan about the causes of the stock market crash. In the late 1950s Sen. Estes Kefauver asked pharmaceutical executives about rising drug prices. In the 1960s Sen. Abraham Ribicoff, with the help of a young lawyer named Ralph Nader, interrogated auto industry executives about their seemingly cavalier attitude toward safety.

Jumping to the recent past: In 2010 the CEO of BP was hauled before a House hearing to testify about the Deepwater Horizon disaster. In 2013 the Senate’s Permanent Subcommittee on Investigations questioned Apple CEO Tim Cook about his company’s international tax avoidance. And so forth.

Yet there is a big difference between the older and the more recent hearings. In the 20th Century these events were preludes to legislative reform. The Pecora hearings led to the passage of the Glass-Steagall Act separating speculative activities from commercial banking. Kefauver tried but failed to pass price restrictions but was able to enact stricter drug manufacturing and reporting rules. The Ribicoff hearings led to the passage of the National Traffic and Motor Vehicle Safety Act and the Highway Safety Act.

Those earlier hearings may have been political theatre, but they were followed by serious regulatory changes. Today’s hearings, on the other hand, seem to be nothing more than theatre. For many members of Congress, they are opportunities to pretend to be concerned about corporate misconduct while having no intention to do anything about it.

That’s not surprising, given that the party in control of both chambers of Congress is rabidly anti-regulation. The 2016 Republican National Platform is filled with critical comments about regulation, including an assertion that the Obama Administration “triggered an avalanche of regulation that wreaks havoc across the economy.”

The Consumer Financial Protection Bureau, the lead regulator in the Wells Fargo fake accounts case, is a favorite target of conservative lawmakers. Right after the CFPB’s Wells Fargo announcement, Speaker Paul Ryan sent out a tweet claiming that the agency “tries to micromanage your everyday life.” Senate Banking Committee Chair Richard Shelby tried to block the appointment of Richard Cordray to head the CFPB and subsequently sought to weaken the agency. And during his opening statement at the hearing, he took a pot shot at CFPB for not being aggressive enough in pursuing the case.

Congressional grandstanding against corporate miscreants has been going on for decades, but what was once a device to build public support for real legislative change now serves mainly to conceal the fact that too many legislators are in office to do the bidding of corporations, even the most corrupt ones.

A Culture of Corruption

The chief executive of Wells Fargo would have us believe that more than 5,000 of his employees spontaneously became corrupt and decided to create bogus accounts for customers who were then charged fees for services they had not requested.

John Stumpf has earned himself a place in the corporate hall of shame for putting the blame on underlings for carrying out a fraud that must have been sanctioned by top officials at the bank, which has a reputation for pushing new products on customers. He may have been inspired by Volkswagen, whose senior people have been claiming that they knew nothing about systematic cheating on auto emissions tests.

After the announcement that Wells would pay $185 million to settle the case, Stumpf did a self-protective interview with the Wall Street Journal in which he insisted that the misconduct was in no way encouraged by management and was inconsistent with the bank’s internal culture. Few seem to be buying that argument, and Wells is facing various federal investigations.

The notion that Wells had been a paragon of virtue is preposterous. The dishonesty begins with its name, which evokes the legendary stagecoach line. The company is actually the descendant of Norwest, a bank holding company based in Minneapolis which changed its name after acquiring the old Wells Fargo in 1998.

Four years later, the combined company had to pay a penalty of $150,000 to settle SEC charges of improperly switching customers among mutual funds. In 2005 the securities industry regulator NASD (now FINRA) fined Wells $3 million for improper sales of mutual funds.

When Wells acquired Wachovia Bank amid the financial meltdown of 2008 it acquired a bunch of legal problems, including a municipal securities bid rigging case that required a $148 million settlement.

Recent years have seen a long list of additional scandals and settlements. In 2009 Wells had to agree to buy back $1.4 billion in auction-rate securities to settle allegations by the California attorney general of misleading investors. In 2011 it agreed to pay $125 million to settle a lawsuit in which a group of pension funds accused it of misrepresenting the quality of pools of mortgage-related securities. That same year, the Federal Reserve announced an $85 million civil penalty against Wells Fargo for steering customers with good qualifications into costly subprime mortgage loans during the housing boom.

In 2012 Wells Fargo was one of five large mortgage servicers that consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. Later that year, the Justice Department announced that Wells Fargo would pay $175 million to settle charges that it engaged in a pattern of discrimination against African-American and Hispanic borrowers in its mortgage lending during the period from 2004 to 2009. Also in 2012, Wells agreed to pay $6.5 million to settle SEC charges that it failed to fully research the risks associated with mortgage-backed securities before selling them to customers such as municipalities and non-profit organizations.

In 2013 Wells was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses; it settled a lawsuit alleging that it neglected the maintenance and marketing of foreclosed homes in black and Latino areas by agreeing to spend at least $42 million to promote home ownership and neighborhood stabilization; and it agreed to pay $869 million to Freddie Mac to repurchase home loans the bank had sold to the mortgage agency that did not conform to the latter’s guidelines.

Jumping to 2016: the Justice Department announced that Wells would pay $1.2 billion to resolve allegations that the bank certified to the Department of Housing and Urban Development that certain residential home mortgage loans were eligible for Federal Housing Administration insurance when they were not, resulting in the government having to pay FHA insurance claims when some of those loans defaulted.

And a few weeks before the CFPB revealed its sham accounts penalty against Wells, the agency fined the bank $3.6 million plus $410,000 in restitution to customers to resolve allegations that it engaged in illegal student loan servicing practices.

Contrary to Stumpf, the sham accounts were much in line with the culture of Wells, which has been corrupt for years. As long as the bank’s top management denies the reality, it seems unlikely anything will change.

Note: This post draws from my newly updated Corporate Rap Sheet on Wells Fargo.

The Real Crime Wave

Donald Trump’s recent economic policy address portrayed an economy crippled by “overregulation.” This came on the heels of his convention acceptance speech depicting a country afflicted by a wave of street crime perpetrated by “illegal immigrants.”

As with most of Trump’s statements, these comments took real issues and distorted them to the point that that they no longer had much resemblance to reality. There is a regulation crisis in the United States, but the problem is inadequate business oversight, not an excess. And there is a crime wave taking place, but the culprits are not immigrants but rather rogue corporations.

It was particularly odd that Trump chose to mention the auto industry in his rant on regulation. It has apparently not come to his attention that just about all the major carmakers are embroiled in some of the biggest safety and compliance scandals in the industry’s history.

Volkswagen exhibited contempt for the law in its long-standing scheme to circumvent auto emission standards. Since the brazen cheating came to light the company has been scrambling to make amends. It had to agree to spend nearly $15 billion (mostly to compensate customers) to resolve some of its legal entanglements, and it may still face criminal charges with larger potential penalties. While the amounts may seem high, VW is lucky it is being allowed to remain in business.

Then there’s the Japanese company Takata, whose airbags have turned out to be deadly and now is reported to have routinely manipulated test results of its products. General Motors had to pay a $900 million fine and Toyota $1.2 billion, both for safety reporting deficiencies. Electric car producer Tesla, which has taken advantage of a lax regulatory regarding self-driving technology, now faces scrutiny in the wake of several serious accidents involving vehicles operating on autopilot.

Automobiles are far from the only industry with serious regulatory compliance problems. In case we had forgotten the severity of the 2010 Deepwater Horizon catastrophe in the Gulf of Mexico, BP provided a reminder recently when it estimated that its legal and clean-up costs will reach more than $61 billion.

And we must not leave out the banks. In a report I put out in June to accompany the expansion of Violation Tracker, I found that since the beginning of 2010 there have been 144 cases settled against major banks with penalties in excess of $100 million each. In all, the banks have had to pay $160 billion in these cases to resolve allegations relating to a wide range of misconduct: mortgage abuses, defrauding of investors, manipulation of foreign exchange markets and interest rate benchmarks, assisting tax evasion, and much more.

Rampant corporate misconduct is one of the missing issues of the presidential race, especially since Bernie Sanders dropped out. Hillary Clinton’s website has some decent language on the subject but she has hardly made it a central issue in her campaign. In her convention acceptance speech she presented an upbeat picture of American business, and her reference to the auto industry was not to criticize its misconduct but to celebrate that it “just had its best year ever.”

Neither Clinton nor Trump can be expected to be a crusader for corporate accountability, but we need to make sure that whoever is the next occupant of the White House feels pressure to rein in and not unleash big business.

Serial Corporate Offenders

The vast majority of regulatory enforcement cases end with an agreement by the corporation to correct its behavior in the future. Monetary penalties are meant to reinforce the lesson and act as a further deterrent.

If only it worked that way. Most large companies are, in fact, repeat offenders. In the recently expanded Violation Tracker database, the 2,000 parent companies account for nearly 30,000 individual cases, an average of 15 each. And that’s only since the beginning of 2010.

Such recidivism is all the more troubling when a company has faced criminal rather than civil charges and been allowed to evade serious consequences through a deferred prosecution agreement (DPA) or a non-prosecution agreement (NPA). The Justice Department uses these gimmicks to allow corporations to resolve criminal matters by paying a fine while avoiding a guilty plea. The theory is that this brush with the law will prompt the company to come into full compliance. If that does not happen, it faces the threat of a real prosecution.

Of the 80 parent companies in Violation Tracker that have signed a DPA or NPA, about half have subsequently had no other reported offenses. Maybe the Justice Department system does work — in some cases.

Yet the other half includes companies that continued to rack up numerous violations from agencies such as EPA and OSHA with seemingly no concern that this would jeopardize their agreement with DOJ. These serial offenders include some of the world’s largest banks, both those based in the United States and those doing substantial business here.

The track records of nine of these banks contain serious cases that were resolved following a DPA or NPA. In some instances, these subsequent matters involved behavior that completely pre-dated the signing of the agreement with DOJ, but not always.

Take Bank of America, which has the dubious distinction of being the most penalized corporation in Violation Tracker, with a total of $56 billion in fines and settlements. In 2010 it signed an NPA and paid $137 million to resolve civil and criminal charges of conspiring to rig bids in the municipal bond derivatives market. Yet in 2014 the Consumer Financial Protection Bureau announced that BofA would pay a $20 million penalty and some $700 million in consumer relief to resolve allegations that it engage in abusive marketing of credit-card add-on products during a period that continued after 2010. The CFPB did not refer to the earlier bid rigging case and there was no indication that BofA’s NPA was a factor in how the credit-card case was handled.

Several banks have managed to follow one DPA or NPA with another. Deutsche Bank has been allowed to sign three such agreements: one in 2010 relating to fraudulent tax shelters, one in 2015 for manipulation of the LIBOR interest rate benchmark, and another that year by its Swiss subsidiary in a tax case related to undeclared accounts held by U.S. citizens.

In other cases, a DPA or NPA was followed by a guilty plea in another criminal matter. After signing an NPA in 2011 in a municipal bond case and a DPA in 2014 for its relationship to the Madoff Ponzi scheme, JPMorgan Chase went on to plead guilty on a foreign exchange market manipulation charge in 2015.

It seems that previous DPAs or NPAs mean little to subsequent cases unless the offense is exactly the same. In 2015, for instance, Justice rebuked UBS for violating its 2012 NPA relating to LIBOR manipulation and terminated the agreement, forcing the Swiss bank to enter a guilty plea.

These various outcomes seem to make little difference to the banks. They continue to break the law in one way or another while paying affordable penalties and being allowed to go on operating as usual. Life is good for career corporate criminals.

What was Done with the Banks’ $110 Billion?

Over the past few years, the Justice Department and state prosecutors have collected tens of billions of dollars in fines and settlements from large banks in a series of cases stemming from fraudulent practices in the period leading up to the financial meltdown of 2008.

Much of the debate on these cases has focused on whether the financial penalties, pursued in lieu of criminal charges against bank executives, were the most appropriate response to widespread bank misconduct. Or else the issue was whether the penalties, especially after accounting for the fact that they were in part tax-deductible, were big enough.

The Wall Street Journal has just published a front-page story addressing yet another facet: what was done with the money, which totaled some $110 billion in cases relating to toxic mortgage-backed securities, foreclosure abuses and related issues. The largest of the cases involved nearly $17 billion from Bank of America in 2014.

Roughly half of the overall total stayed with the federal government, with little disclosure of how it is being used. It appears that most of the roughly $50 billion has simply gone into the Treasury and was comingled with other federal funds.

The Journal states: “Bank executives grumble privately about the opaque process and are critical the government didn’t ensure more money went to housing-related issues.” Opinions of the culprits should not count for much in this discussion. The fact that the Journal cites them adds to the suspicion that paper is in some way trying to discredit the feds for their handling of the cases.

That posture is more explicit when it comes to the share of the money that ended up with the states. The Journal implies there is something wrong with New York’s decision to use some of its settlement funds to replace the Tappan Zee Bridge north of New York City and to provide high-speed internet access in rural communities — or the decision of other states to direct settlement funds into state pension funds. One can disagree with the particular uses, but they are all valid public purposes.

After devoting most of the article to these imaginary scandals, the Journal finally gets to what is really the most important issue: what the banks themselves are doing with the roughly $45 billion of the total that was supposed to be devoted to consumer relief. It’s important to realize that the banks were not required to simply distribute these funds to abused customers in the form of reparations (which might have been a good idea).

Instead, the banks get credit toward the consumer relief settlement portions ($7 billion in the case of BofA) when they modify existing mortgages or make new loans to low-income consumers who lost their homes to foreclosure. In other words, they are being credited for restoring loans to more reasonable terms and thereby increasing the chances that the homeowners will avoid default. This is good for the homeowners but it also benefits the banks.

The Journal article describes the case of one homeowner who did not benefit much from her mortgage modification. On the other hand, Eric Green, the monitor of the BofA settlement has glowing words for the program in his most recent report. He says that first lien principal reductions have averaged 51 percent, that the average loan-to-value ratio has been brought down from 179 percent to 75 percent, that the average interest rate has been cut in half, and that the average monthly payment has been reduced 38 percent, or more than $600.

There may be more to the story, but this is what the Journal should be investigating rather than implying that it was a mistake to extract large sums from banks to pay for their sins.

Dealing with Corporate Culprits

The Big Short movie and the Bernie Sanders presidential campaign are not the only things reminding us about the role of bank misconduct in the financial meltdown. Federal and state prosecutors are continuing to wrap up cases brought against the main culprits.

The Justice Department just announced that Morgan Stanley will pay $2.6 billion to settle allegations relating to the sale of toxic residential mortgage-backed securities, with another $550 million going to New York State and $22.5 million to Illinois. This comes a few weeks after Goldman Sachs disclosed that it expects to pay up to $5 billion to resolve similar allegations, while Wells Fargo is paying $1.2 billion to settle allegations that it engaged in reckless underwriting and fraudulent loan certification for thousands of loans insured by the Federal Housing Administration that ultimately defaulted.

These are the latest in a string of settlements that included a $16.7 billion payout by Bank of America in 2014 and $13 billion by JPMorgan Chase the year before.

Donald Trump harps on the notion that the government makes lousy deals. Can that be said of these bank settlements?

In one respect, they are a big improvement in the terms on which the feds resolved cases of corporate malfeasance in the past. Compelling companies to cough up billions of dollars begins to bring enforcement into the 21st Century. By comparison, regulatory agencies such as OSHA, bound by outdated legislation, are still fining companies only a few thousand dollars for serious violations.

The magnitude of the bank settlements is lessened by the fact, as U.S. PIRG tirelessly points out, that some portions of the payouts are tax deductible. Even so, the after-tax costs can have an impact. For example, Deutsche Bank, which last year had to pay out some $2.5 billion to settle charges relating to manipulation of the LIBOR interest rate index (and earlier settled a toxic securities case for $1.9 billion), recently cited legal costs as a key factor in announcing an annual loss of more than $7 billion.

The big U.S. banks, however, remain quite profitable and have had little difficulty handling their settlement costs, parts of which are stretched out over years. Their punishment has entailed limited pain.

By all rights, the discussion of this issue should not be framed simply in terms of dollars. We should also be talking about the appropriate length of the prison sentences for the banking executives who should have been personally prosecuted for the abuses.

Unfortunately, the type of criminal justice reform now being discussed for street offenses has already been in effect for many years with regard to white collar crime. Corporate crooks do not have to worry about mandatory minimums, given that they are rarely prosecuted at all. The decriminalization being discussed for the drug trade has long been the norm for the more respectable branches of commerce.

Even if the political will were present, it is too late to begin prosecuting those responsible for the financial meltdown. Yet there is little doubt that new frauds are in the works and will eventually break out into the open. Unless things change, the culprits will once again beat the rap. And that’s a bad deal for the rest of us.

Too Big to Be Honest

breakingup For a long time the big financial institutions of the United States had an unrelenting urge to grow bigger. Acting on the principle that only the big would survive, banks and related entities spent the 1990s and the early 2000s gobbling up one another at a furious pace. The result was a small group of mega-institutions such as Citigroup and Bank of America that nearly brought down the whole financial system in 2008.

Federal regulators declined to break up the giants, which in recent years have grown only larger. But now some of the rules put in place in the wake of the meltdown are having the desired effect. Some major financial players are deciding to split themselves up in the hope of evading the more stringent capital requirements imposed on companies designated as systemically important (SiFi) institutions.

The latest firm to bow to this pressure is insurance behemoth MetLife, which just announced it is exploring a spinoff of its retail life and annuity business in the U.S. into a new presumably non-SiFi company. The move comes in the wake of moves by General Electric to dismantle large parts of its huge GE Capital business. Among the businesses that contributed to GE Capital’s heft was the banking operation it purchased from MetLife in 2011 as part of a previous move by the insurer to reduce its regulatory oversight.

Now other large insurers such as Prudential Financial and American International Group, the latter the recipient of a $180 billion federal bailout, may take similar steps. Apart from the regulatory pressures, AIG has been dealing with breakup calls from investors such as John Paulson and Carl Icahn, who dubbed it “too big to succeed.”

It remains to be seen whether the big banks will succumb to the breakup. For the moment they are resisting, but that’s the stance MetLife had long maintained. Their sagging stock prices make them susceptible to a move by someone like Icahn.

It’s gratifying to see regulation working as designed to make the country less vulnerable to large reckless institutions and a bit less enthralled with financialization. GE’s announcement that it is moving its headquarters to Boston is part of its retreat from finance.

Yet more still needs to be done to get the banks to clean up their act. Stricter capital rules are fine, but the likes of B of A and JPMorgan Chase need to feel more pressure to obey the law. They’ve had to cough up larger and larger financial settlements and in a few cases have even had to plead guilty to criminal charges. Yet they haven’t gotten the message.

Perhaps what’s needed are “honesty requirements” to go along with the more stringent capital requirements. In other words, banks that break the law would have to sell off the businesses involved in the misconduct. This would accelerate the move away from overly large financial institutions and hopefully put more operations in the hands of firms that are willing to play by the rules.

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Note: the Dirt Diggers Digest Enforcement page, which provides links to the compliance data posted by more than 50 federal regulatory agencies, has just been updated and expanded.