Elizabeth Warren discovers the policy of financial failure containment

In her first public session of the Senate Banking Committee, Senator Elizabeth Warren discovered the policy of financial failure containment and its corollary, the Geithner Doctrine (from Yves Smith, do nothing that hurts the profitability or reputation of a bank that is big and/or politically connected).

Senator Warren discovered the policy of financial failure containment as she tried to understand why no banker has gone to jail as a result of the frauds, including money laundering, that have been going on in the banking sector.

As reported by MarketWatch,

In her first hearing as a U.S. senator Thursday, Elizabeth Warren criticized federal regulators for settling civil cases with Wall Street banks instead of taking them to trial. 

“I want to note that there are district attorneys and U.S. attorneys who are out there everyday squeezing ordinary citizens on sometimes very thin grounds and taking them to trial to ‘make an example,’ as they put it,” she told bank regulators testifying at a Senate Banking Committee hearing. “I am really concerned that too-big-to-fail has become too-big-for-trial.”....

Warren acknowledged that trials are expensive but she insisted that if an agency is unwilling to go to trial it is because they are “too timid” or lack resources. She said that the consequence is that if large financial institutions can break the law and “drag in billions” in profits and settle, then they don’t have much incentive to follow the law. 

“Every time there is a settlement and not a trial, it means we didn’t have the days and days and days of testimony about what those financial institutions were up to,” Warren said....

Regular readers know that the Pecora Commission through its days and days of testimony set the stage for the implementation of the FDR Framework in the 1930s.

It is important to have this testimony as it highlights why transparency is needed in all the opaque corners of the financial system.

Warren asked bank regulators how tough they are and raised the question about when was the last time any regulator took a Wall Street bank to trial. 

“Anybody?” she asked.... 

Thomas Curry, the Comptroller of the Currency, which regulates national banks and thrifts, said the agency has not had to bring big banks to trial “as a practical matter” to achieve the regulator’s supervisory goals.

Please re-read the highlighted text as Mr. Curry is going to describe how the policy of financial failure containment and the Geithner Doctrine operate.

Curry added that the agency has had a fair number of consent orders “so we don’t have to bring people to a trial.” He said the primary motive of the agency’s enforcement actions is to identify the problem and demand a solution to it on an “on-going” basis.

And there we have the policy of financial failure containment.

Regulators find a problem and ask that banks stop.  If the banks don't stop because stopping would hurt their profitability, they ask again.  This cycle can continue indefinitely (see Matt Taibbi and his discussion of how HSBC continued to launder money despite repeated enforcement actions).

Big banks include J.P. Morgan Chase & Co. (NYSE:JPM) , Citigroup Inc. (NYSE:C)   and Goldman Sachs Group Inc. (NYSE:GS)

And here we have a list of the banks that the Geithner Doctrine applies to.

Securities and Exchange Commission Chairman Elisse Walter said that she believes the agency has a “very vigorous enforcement program” and that the commission looks at the distinction between what could be achieved in trial vs. what the SEC could obtain without a trial. 

An SEC spokesman said the agency is “fully prepared” to go to trial every time the commission files a lawsuit. However, he added that there is “no reason” under the SEC’s authority to delay justice and relief for investors when the agency can “get it all without a trial.”...

What could be achieved in a trial is that the bank's actions are made public and as a result of pushback, Congress takes legislative action so that if it happens again it is defined as illegal with strict penalties.

“As you know among our remedies are penalties, but the penalties we can receive are limited and we have asked for additional authority to raise penalties,” Walter said.

It is not the size of the penalty that is the issue, the issue is that Wall Street never has to say it was guilty.

By not having to say it is guilty, Wall Street is able to treat the penalties as a simple cost of doing business and violating the law for gain.

Last month Warren and Rep. Elijah Cummings, a Democrat from Maryland, sent a letter to Federal Reserve Chairman Ben Bernanke and Curry seeking documents about a series of mortgage settlements with large banks over foreclosure abuses stemming from the so-called robo-signing scandal. 

The Fed and the Office of the Comptroller of the Currency reached settlements last month with 13 big banks over the abuses. 

The two lawmakers sought the information to “identify the scope of the harms found” to establish “confidence in the sufficiency and integrity of the settlement”

Under the policy of financial failure containment and its corollary, the Geithner Doctrine, the settlement continued giving the big banks get out of jail free cards and pushing the losses from the banks' activities onto society.