In a recent interview with PBS's Frontline, Lanny Breuer, head of the criminal division at the Department of Justice, appeared to admit that some financial institutions were too big to prosecute. In the "too big to fail is too big to jail" controversy that ensued, lobbyists and other supporters of big Wall Street firms tried all kinds of complicated ways to spin Mr. Breuer's words.
Their job got a lot harder yesterday when Eric Holder, the attorney general, stated clearly to the Senate Judiciary Committee:
"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," (Watch the video for yourself.)
According to Mr. Holder, speaking as the top enforcer of the country's laws, "some of these institutions have become too large."
Senator Sherrod Brown (D, OH), a leading voice for making the biggest banks smaller, reacted in this way:
"You expect trouble bringing a criminal to justice when he flees to a hostile foreign country; but it's shocking that the Justice Department cannot pursue criminal activity when somebody simply walks through the doors of a Wall Street megabank. The laws of the United States must apply equally to both a $2-trillion Wall Street bank and a $200-million bank in Ohio."
American Banker, a trade publication, called Mr. Holder's statement a "stunning admission" and suggested this could mark a turning point in the debate about the size of very large financial institutions.
Senator David Vitter (R, LA), who is working with Senator Brown on legislation to reduce the size of our largest banks, said, "It's another glaring example that 'too big to fail' is alive and well" (this is in the American Banker piece). (Any Brown-Vitter legislation would presumably be similar in content to the Brown-Kaufman amendment, which was defeated during the Dodd-Frank Senate debate in spring 2010; you can review Senator Brown's latest legislative proposal here.)
Senator Elizabeth Warren (D, MA) has been outspoken in her opposition to banks that are "too big for trial." Despite being new to the Senate, she has already hammered the regulators on this point. Following Eric Holder's statement she said, "Attorney General Holder's testimony that the biggest banks are too-big-to-jail shows once again that it is past time to end too-big-to-fail."
Some defenders of the global megabanks claim the issues are very complicated and much more study is needed before we take any action. The Board of Governors of the Federal Reserve, for example, seems inclined to do nothing.
This would be a mistake. Eric Holder's remarks yesterday were not accidental or an aside -- he is emphasizing that the world's biggest banks are now above the law. The Dodd-Frank financial reform legislation did not end the problems of "too big to fail".
Will President Obama and his team now do anything about it -- such as supporting the Brown-Vitter legislation or helping Elizabeth Warren put more effective pressure on the Federal Reserve to take immediate action?
Will the Department of Justice itself answer the tough questions posed by Senator Brown and Senator Chuck Grassley after the Lanny Breuer disclosures? Who exactly at the Department of Justice decides that a bank is too big to prosecute - and on what basis? Is there a rule book or a list of criteria? Or, more likely, is this something totally made up on the spur of the moment and on an ad hoc basis?
The Justice Department's budget documents prominently quote Thomas Jefferson: "The most sacred of the duties of government [is] to do equal and impartial justice to all its citizens."
The attorney general just told Congress and the country that this principle no longer applies to very large financial institution.
Simon Johnson is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario. Read more from the Fiscal Affairs series here.