Journalism in the Public Interest

The Sorry State of Bank Apologies


(Left: Joshua Roberts/Bloomberg via Getty Images, right: Ramin Talaie/Getty Images)

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Admitting a problem, as the cliché has it, is the first step to solving it. But with the Justice Department and the Securities and Exchange Commission, admissions of wrongdoing have been the last step. There’s much work to be done to hold giant corporations accountable for their misdeeds.

Over the last few years, the Justice Department and the S.E.C. have been assailed for delivering lashings to corporate malefactors that resemble a fanning with palm fronds. In response, the Justice Department and the S.E.C. would like us to think that they received the message and got tough. This summer, the Justice Department forced Credit Suisse and BNP Paribas to plead guilty to crimes. In some of its recent settlements, the S.E.C. has been requiring individuals and corporations admit that they did something wrong.

Such public statements of contrition have some degree of usefulness. It’s almost ridiculous that we consider it progress by merely forcing bad actors to admit the truth — but it is. For years, the Justice Department relied on deferred or non-prosecution agreements, requiring corporations to write big checks but face little or no other consequences. For years, the S.E.C.’s settlements by default included boilerplate clauses where the accused could pay up without either admitting or denying the charges. (Alas, the progress has been halting and the Doctrine of Immaculate Settlements is alive and well: Just last month, Morgan Stanley settled with the agency for misleading investors in two residential mortgage-backed securities the firm sold. But, whoops, the agency forgot to get any admission of wrongdoing.)

Compelling an admission is merely the first vertebra of the spine insertion surgery. The problem with the Justice Department’s guilty pleas is that they lead to no further business consequences. And the new S.E.C. admissions policy doesn’t require defendants to cop to anything specific.

The S.E.C.’s action against the hedge fund manager Philip Falcone was the first big public “apology” case. As Jonathan Weil pointed out in a Bloomberg View column at the time, Mr. Falcone “admitted to a long list of facts that certainly look awful,” such as secretly borrowing $133 million from his hedge fund to pay his taxes. But he didn’t admit to breaking any specific laws.

That’s not how things work for criminals. In plea agreements, defendants say which laws they are guilty of, like, for instance, explaining to the judge that they tried to bring a kilogram of coke through Miami International Airport. The S.E.C. hasn’t yet required statutory specificity.

The Justice Department’s giant civil settlements with JPMorgan and Citigroup have come with paltry statements of facts that mention few specifics and don’t name individual executives who have done anything wrong.

If one purpose of requiring a company to admit it has broken the law is to change the way customers, clients and shareholders view it, then the latest admissions have failed. The stocks of companies that settle with the Justice Department go up because investors view the problem as resolved. Shareholders don’t think of these companies as wrongdoers or recidivists. Nor do counterparties and those that provide services to firms.

Steven A. Cohen’s S.A.C. Capital recently pleaded guilty to fraud. Mr. Cohen changed the name of his firm in April and, presto, investment banks continued to offer him brokerage services. The public shaming wasn’t much for that guy.

One of the main goals of corporate enforcement should be to stay on top of companies to make sure they have reformed their behavior. There is a modicum of progress here. In some of the latest settlements, the Justice Department is assigning corporate monitors who seem to take their jobs more seriously. Just last week, the top New York State financial regulator, Benjamin M. Lawsky, fined Standard Chartered for backsliding. It would be heartening to see similarly aggressive action from the Justice Department and the S.E.C.

Another side effect of the nonspecific admissions in resolutions reached by the Justice Department and the S.E.C. is that they provide no road map for private litigants. And, sure enough, recent guilty pleas and civil settlements don’t appear to be leading to much, if any, follow-on private litigation.

Now, everyone would agree that it is not the government’s job to help plaintiffs’ lawyers make cases. By the same token, neither is it the government’s job to tailor its enforcement actions so that bad actors are protected from further consequences. The government doesn’t have the resources to prosecute every wrongdoer. Private litigants are a necessary supplement to government actions.

Some argue that corporate apologies are pointless and all that matters is the prosecution of executives and supervisors who oversaw the misdeeds. That may be too absolute an approach, but it is vital to charge individuals, especially those at the top. On this issue, the authorities continue to fail. The admissions and guilty pleas could be a path to investigations and charges against individuals. Instead, there is no sign that these will lead to charges against top officials and managers who were responsible for the crimes. Indeed, it’s the opposite.

The apology shouldn’t be an end, but a beginning.

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)