Former TARP Watchdog On Credit Suisse Settlement

May 20, 2014
Originally published on May 20, 2014 3:08 pm

Banking giant Credit Suisse has admitted to “knowingly and willfully” helping thousands of U.S. clients hide income and assets from the IRS.

But while the bank will pay $2.6 billion in a settlement, it will not be forced to reveal the names of the clients who cheated on their taxes and no one at the bank will go to jail, despite admitting to criminal charges.

Neil Barofsky, former inspector general for the Troubled Asset Relief Program (TARP), tells Here & Now’s Jeremy Hobson that banks are still too big, and the same incentives that led to the financial crisis are still there.

“It’s just a question of when, not if,” for the next financial crisis, Barofsky said. “You can’t look at fundamental broken incentives in the financial system and not come to the conclusion other than we are headed down the same dangerous path that culminated in the explosion of 2008.”


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From NPR and WBUR Boston, I'm Jeremy Hobson.


I'm Robin Young. It's HERE AND NOW. They're breaking ground on a new medical center in Moore, Oklahoma to replace the one demolished by that tornado a year ago. We'll see what else is going on.

HOBSON: But first, let's get to that $2.6 billion settlement between the U.S. and Credit Suisse. The Swiss banking giant has admitted to knowingly and willfully helping thousands of U.S. clients hide income and assets from the IRS. It is a rare admission of guilt from a bank, but no managers at Credit Suisse are losing their jobs or going to jail.

Let's get reaction from Neil Barofsky, former inspector general for the Troubled Asset Relief Program, or TARP. He's the author of "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." He's with us from New York. Neil welcome back to HERE AND NOW.

NEIL BAROFSKY: Thanks for having me.

HOBSON: Well, do you think this settlement is a win for the government or a win for the bank?

BAROFSKY: Well, you know, it's one of those things we're going to have to wait and see exactly. I mean, it's definitely a win for the Department of Justice and the government in that they've achieved something that they've not been able to or willing to do in decades, which is to get a guilty plea out of the holding company of a big, large, internationally, interconnected institution that many would deem as too big to fail, something that a lot of folks thought they were unwilling or unable to do.

So in that respect it's a win for the government, but on the other hand, Credit Suisse got a little bit of a win in that the full impact of a criminal prosecution has been somewhat blunted by some of the conditions and some of the assurances the Department of Justice was able to get from some of the regulators. That's going to let them keep their license and their ability to continue doing business here in the United States.

HOBSON: And no one goes to jail over this, and no one's losing their job over this, at least not yet. And none of the people who broke the law by evading taxes are being revealed.

BAROFSKY: Yeah, and those are aspects where it's a little less than satisfying than the full-throated declaration of mission accomplished during the press conference here. You would think when a company is pleading guilty to serious federal felonies that there might be some accountability at the highest ranks, and so far we just haven't seen that here.

HOBSON: Well, why is that? Because Attorney General Holder says that no financial institution, no matter its size or global reach, is above the law. But it does seem like the bank here, and perhaps you could say Wall Street banks in general, are being treated differently than ordinary Americans who break the law.

BAROFSKY: Oh there's no question about it, and this is the tight rope that the Department of Justice has been trying to walk, is that how do you deal with these institutions, which on the one hand are so big and so interconnected that a full-fledged approach and application of the criminal law not only would take them down but have the potential of taking down the entire financial system with them.

And on the other hand, you have to do something when they're breaking the law with impunity, as we've seen these institutions time and time again. So they've tried to strike a balance here by using one of the strongest tools in the prosecutorial toolkit, criminal guilty plea by a parent company, but they've also felt like they've had to soften that blow.

And that's special treatment and that blunts the impact, the deterrent value and really the bang for the buck that you get from a criminal prosecution, and it's a lot different. Look, if you and are indicted, we're not going to get that type of special treatment.

HOBSON: Right.

BAROFSKY: Nobody's going to talk to our boss and say, hey, make sure that Neil keeps his job, or let's make sure Neil can still vote, or all the normal collateral consequences of a guilty plea. It's not going to apply to these institutions because they're still too big to fail.

HOBSON: Is a settlement like this enough to keep other banks from doing what Credit Suisse has admitted to doing, which is to help thousands of U.S. clients evade taxes?

BAROFSKY: Well, that's the two and a half billion dollar question. It really is. And we're going to have to wait and see. If at the end of the day all of this means it that Credit Suisse pays two and a half billion dollars and suffers a couple of other minor indignities, but the executives keep their jobs, and, you know, they don't have a run on the bank and clients don't flee, and they don't have any significant regulatory consequences, then it'll be viewed much like some of the settlements and agreements that preceded this as just a cost of doing business, and it becomes a profit and loss estimate of whether or not engaging in criminal conduct is - makes economic sense of not.

If on the other hand, there are significant consequences, they do lose clients, there are some impacts that are not yet apparent, then I think you can see that type of deterrent effect. But so far, just a few hours into this, it appears to more of the former than the latter, and trying to get that Goldilocks balance of just right, the Department of Justice may have shot a little bit short. But it's still too early to tell, to be honest with you.

HOBSON: Neil Borofsky, before I let you go, I want to ask you whether you think that since the financial crisis, and now we're coming on six years since the financial crisis, that the government has taken steps to make sure that something like that couldn't happen again when it comes to regulation of the banks on Wall Street.

BAROFSKY: Oh no, absolutely not, and I think this is a great indication that we've still fallen far, far short of addressing the issues that come with too big to fail institutions. The bottom line is that no institution should be able to come to the Department of Justice having committed a crime and get special treatment simply because of their size and their interconnectedness. We've got to break these institutions up.

We've got to make sure that if you're going to make that excuse, if you're one of these banks and say, gee, you can't do the full force of the law because if you do you'll trigger an economic cataclysm, the answer should be, OK, we'll give it to you this one time, but you've got to go back and break yourself up, or we need to proactively break up these institutions to make sure that the full force of the law can apply to all institutions no matter their size, their importance or even their political capital.

So I still think we have a long way to go before we solve the problems that brought us to the brink in 2008.

HOBSON: The former Treasury secretary, Timothy Geithner, has been on a book tour and he's been defending how the administration handled Wall Street, a lot of people angry at his handling in particular. But what do you think? Do you think that the administration, as he said, did the best that they could under the circumstances?

BAROFSKY: No, unfortunately, and sure, you know, Mr. Geithner has his right to sort of portray history in the way that is most - looks most favorably upon him. But the bottom line is that the administration's response to the financial crisis was in many ways a total failure. They absolutely failed to address the needs and the impact of the crisis on homeowners, as they were required to do by Congress, and there are millions of people today who are still suffering from the foreclosure crisis who have unnecessarily lost their homes with the incredible drag on the overall economy.

Although it is good that we averted a catastrophe back in 2008, the way that we did so I believe has unfortunately set the stage for an even more devastating financial crisis in the future.

HOBSON: In the future? How far?

BAROFSKY: Well, if I knew that, Michael Lewis would be writing his next book about people who made billions on timing the markets perfectly about me, which would be great.


BAROFSKY: But if you look, a lot of the same broken incentives from 2008 are still there. It's just a question of when, not if. You can't look at the fundamental broken incentives in the financial system and really come to a conclusion other than that we're headed down the same dangerous path that we were that culminated in the explosion of '08.

HOBSON: The book is "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." Neil Barofsky, former inspector general for TARP and also currently a partner at Jenner & Block. Thank you so much for joining us.

BAROFSKY: Thank you so much for having me. Transcript provided by NPR, Copyright NPR.