Too Big to Jail

Switzerland and the European Union have reined in bankers. So why can’t the U.S.?

Leo Gerard, United Steelworkers PresidentMarch 12, 2013

March 15, 2012: On the theory that 'the bank took our homes so we're moving in with them,' Occupy Wall Street activists 'moved in' to an NYC Bank of America branch by setting up a sidewalk living room. (MikeFleshman/WikimediaCommons/CreativeCommons)

The U.S. Attor­ney last week con­firmed Amer­i­cans’ fears about Wall Street. The banks, Eric Hold­er said, were not just too big to fail; they were also too big to jail.

If these banks are so big that prosecuting outlaw executives in one will take down the economy, then it’s impossible to believe that taxpayers won’t be forced to bail them out again when Wall Street loses its next big gamble.

That means bankers oper­ate beyond the pale, out­side the his­tor­i­cal fence line encir­cling civ­il soci­ety. Past the pale is where bar­bar­ians resided, return­ing reg­u­lar­ly to ram­page. These days, bankers oper­ate from beyond the pale, raid­ing civ­i­liza­tion with impunity.

Unlike vul­ner­a­ble ancient vil­lages, how­ev­er, the Unit­ed States has con­sid­er­able pow­er over these banker bar­bar­ians. Banks, after all, are noth­ing but cor­po­ra­tions. Cor­po­ra­tions are legal con­structs that cit­i­zens have the right to rebuild to prop­er­ly serve soci­ety. Euro­pean coun­tries began doing that last week. Their first steps includ­ed lim­it­ing banker bonus­es and giv­ing share­hold­ers bind­ing say on CEO pay.

It start­ed on Sun­day, March 3, when the Swiss vot­ed to grant to those who own cor­po­ra­tions — the share­hold­ers— the right to deter­mine exec­u­tives’ and direc­tors’ pay. In addi­tion, the ref­er­en­dum out­lawed gold­en hand­shakes and gold­en para­chutes. These are mas­sive hand­outs to cor­po­rate exec­u­tives — like the $78 mil­lion that Swiss-based health­care prod­ucts cor­po­ra­tion Novar­tis pro­posed as a good­bye gift for CEO Daniel Vasella.

Nation­wide out­rage scut­tled Vasella’s wind­fall and with­ered ref­er­en­dum oppo­nents. The mea­sure, called the Min­der Ini­tia­tive after its author Thomas Min­der, passed with 68 per­cent of the vote. Even before Vasel­la, the Swiss were annoyed that the country’s biggest bank, UBS, had to be bailed out and that anoth­er huge bank, Cred­it Suisse, gave its CEO $76 mil­lion in shares in 2010.

So they did some­thing. They changed the rules to tame banker bar­bar­ians and rogue corporations.

Two days after the Swiss ref­er­en­dum, the Euro­pean Union’s finance min­is­ters vot­ed 26-to‑1 to lim­it banker bonus­es. Begin­ning next year, a bonus may not exceed the amount of a banker’s annu­al salary. Or, if the bank’s own­ers — the share­hold­ers — approve, a bonus may be as high as twice the salary.

The intent is to reduce risk tak­ing. When bankers win big gam­bles, they’re reward­ed with big bonus­es. When they lose, tax­pay­ers bail them out. The E.U. low­ered the bonus pay­ments, low­ered the wager­ing incen­tive, and low­ered the chances of anoth­er bailout.

Only Britain, a major bank­ing cen­ter, vot­ed to con­tin­ue the cur­rent régime of tax­pay­er-financed bank gam­bling. Prime Min­is­ter David Cameron took a con­sid­er­able risk him­self to side with banks since the vast major­i­ty of the British elec­torate, suf­fer­ing under aus­ter­i­ty, resents the bank­ing indus­try for crash­ing the econ­o­my, extract­ing bailouts and pock­et­ing regal pay.

In addi­tion to cap­ping banker bonus­es, the mea­sure stiff­ens cap­i­tal require­ments for some 8,300 Euro­pean banks in the 27 Euro­pean Union coun­tries to pre­vent anoth­er finan­cial cri­sis as well as man­dat­ing that the banks pub­lish detailed infor­ma­tion on prof­its, tax­es and subsidies.

Although, obvi­ous­ly, the Unit­ed States isn’t an E.U. mem­ber, the mea­sure appears to affect some Amer­i­can banks and bankers. For exam­ple, it like­ly would cap the bonus­es of exec­u­tives work­ing in New York for London’s Bar­clays and those work­ing in Lon­don for Wall Street bank Citigroup.

That’s good for the Unit­ed States, which looks like a leg­isla­tive sis­sy com­pared to Switzer­land. Con­gress gave Amer­i­can share­hold­ers a faint say on pay— they may vote, but only every third year and only as a non-bind­ing advi­so­ry. Con­gress said cor­po­rate exec­u­tives and direc­tors are free to ignore the peo­ple who own the com­pa­ny and pay them­selves what­ev­er they want.

In addi­tion, Con­gress required cor­po­ra­tions to report the ratio of a CEO’s com­pen­sa­tion to that received by the company’s medi­an work­er. But cor­po­ra­tions aren’t doing it — because no one’s enforc­ing it.

These mea­sures were includ­ed in the 2011 Dodd-Frank law, which was hyped as leg­is­la­tion to pre­vent anoth­er Wall Street bailout.

Attor­ney Gen­er­al Eric Hold­er erod­ed con­fi­dence in that on Wednes­day when he tes­ti­fied that crim­i­nal Wall Street bankers are too big to jail. Here’s what he said:

I am con­cerned that the size of some of these insti­tu­tions becomes so large that it does become dif­fi­cult for us to pros­e­cute them when we are hit with indi­ca­tions that if you do pros­e­cute, if you do bring a crim­i­nal charge, it will have a neg­a­tive impact on the nation­al econ­o­my, per­haps even the world economy.”

If these banks are so big that pros­e­cut­ing out­law exec­u­tives in one will take down the econ­o­my, then it’s impos­si­ble to believe that tax­pay­ers won’t be forced to bail them out again when Wall Street los­es its next big gamble.

What Eric Hold­er said is that these banks oper­ate beyond the pale, out­side the rules of soci­ety because they’re too gar­gan­tu­an for soci­ety to hold account­able. They can do any­thing they want. They can gam­ble like crazy, and when it fails, suf­fer no con­se­quences. Tax­pay­ers will back­stop their loss­es. And pros­e­cu­tors will decline to pros­e­cute. That is exact­ly what hap­pened in 2008.

The E.U. has refused to stand by help­less­ly again, like The Three Bears, while some Euro­pean ver­sion of Gold­man Sachs ran­sacks their finan­cial house. The Swiss and the 27 Euro­pean Union coun­tries vot­ed to change the rules in order to restrain cor­po­rate rene­gades and ensure banks oper­ate in ways that ben­e­fit society.

What they did is not enough. But it’s a good start. The vast major­i­ty of Amer­i­cans abide by society’s rules and live inside the pale. They need leg­is­la­tion to yank bankers back with­in that fence.

Leo Ger­ard is inter­na­tion­al pres­i­dent of the Unit­ed Steel­work­ers Union, part of the AFL-CIO. The son of a union min­er; Ger­ard start­ed work­ing at a nick­el smelter in Sud­bury, Ontario, at age 18, and rose through the union’s ranks to be appoint­ed the sev­enth inter­na­tion­al pres­i­dent Feb. 28, 2001. For more infor­ma­tion about Ger­ard, vis­it usw​.org.
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