The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  The aide nicknamed Breuer “Jon Lovitz” because of his voice and “the overall impression that the guy was a pussy,” as he put it. When Breuer was appointed in Obama’s first term to head the Department of Justice’s Criminal Division, staffers on the Hill were shocked.

  “This is a corporate flack who was such a zero, you had twenty-five-year-olds in Congress who wouldn’t return his phone calls,” recalls one. “And suddenly we all look up, and he’s head of the Criminal Division of the Justice Department. We’re all like, ‘How did that happen?’ ”

  So Breuer was now on the other side of the aisle, no longer defending a recent target of a Senate inquiry, but prosecuting one. HSBC earlier that summer had been raked over the coals by the notoriously uncompromising Permanent Subcommittee on Investigations, led by irascible Michigan Democrat Carl Levin.

  Incidentally, Levin’s committee, which had no prosecutorial power, had on multiple occasions since the financial crisis tried to jump-start criminal indictments or regulatory actions by undertaking long investigations that agencies like the SEC, the OCC, and the Justice Department seemed reluctant to do themselves.

  When the FBI was out chasing Roger Clemens for perjury, Levin’s crew was making a case in a lengthy report that Lloyd Blankfein and other Goldman officials had lied to Congress. When the SEC and the OCC and the CFTC were slow to go after the banks, derivative dealers, and home lenders responsible for the sweeping fraud in the mortgage crisis, Levin’s committee gathered evidence against firms like Washington Mutual, Deutsche Bank, and others.

  But the Senate had no power to actually do anything other than shine a light. It had done so again in the HSBC case, and now, apparently, the Justice Department was actually going to follow up for once. But how?

  Breuer paused before beginning his remarks. He opened with a few niceties and introductions, then got right to the point.

  “HSBC is being held accountable for stunning failures of oversight—and worse—that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries,” Breuer told the waiting press. “The record of dysfunction that prevailed at HSBC for many years was astonishing. Today, HSBC is paying a heavy price for its conduct, and, under the terms of today’s agreement, if the bank fails to comply with the agreement in any way, we …”

  Reporters looked at each other. We what?

  “We reserve the right to fully prosecute it,” Breuer went on.

  Stunned silence fell over the room. Did they just hear him right? What exactly was the penalty he was announcing?

  Nothing. In terms of jail time, anyway, the penalty was nothing. No individual would be charged with anything or have to pay a dollar in fines. No person in any of HSBC’s banks anywhere in the world had to have so much as a ticket on his record.

  The only penalty was a settlement. It was a big fine: $1.9 billion, at the time the biggest such fine in history—which sounds impressive until you realize the sum equaled about five weeks of revenue for a bank that earned somewhere north of $22 billion a year. Oh, and HSBC had to partially—not fully but partially—defer some of its bonus payments to top executives.

  And it had to apologize, which it did. “We are profoundly sorry,” said CEO Stuart Gulliver.

  The cops had let HSBC walk out of the park.

  In accepting the HSBC settlement terms, Lanny Breuer was still thinking like a defense lawyer. The sheer size of the sum he’d just extracted from the giant Euro bank clearly impressed him in a positive way, in his new role as assistant attorney general, in the same way a number that same size would likely have negatively impressed him all the way to an aneurysm, had it been dropped on him in a defense capacity.

  But it was just money. It was a big number, but it didn’t mean anything to any actual human beings. It didn’t come out of any individual’s pocket at the bank. In terms of individual punishment, it was still actually a smaller sentence than Tory Marone’s forty days at Rikers.

  Nonetheless, at the press conference that day, you could see it on his face: One point nine billion dollars—I negotiated a hell of a deal!

  And when the questions started shooting his way from the press, he seemed to be saying: What do you want from me? This is probably as much money as we were going to get.

  “I don’t think the banks got off easy,” he said, adding, “We’ve held them very much accountable. I’m not sure you can find a more robust resolution.”

  But Breuer was standing less than a mile from a homeless drifter who at that very minute was getting a “more robust solution” for having half a joint in his pocket.

  For aiding and abetting drug cartels suspected in more than twenty thousand murders, groups famous for creating the world’s most gruesome torture videos—the Sinaloa Cartel in particular, with its style of high-volume reprisal killings and public chainsawings and disembowelings, makes al-Qaeda look like the Peace Corps—HSBC got a walk. Tory Marone, for smoking their product and passing out on a park bench, got sent to jail.

  This meant the very lowest kind of offender in the illegal drug business, the retail consumer at the very bottom of the drug food chain, had received a far stiffer sentence than officials at HSBC who were hundreds of millions of dollars deep into the illegal drug business, not for any excusable reason but just to seek profits to pile on top of profits.

  With a few exceptions, the press had mostly been quiet in the years of nonprosecutions that followed the 2008 crash. But the HSBC settlement was met with almost universal outrage, with a dash of genuine wonder mixed in. “What’s a bank got to do to get into some real trouble around here?” wrote Forbes magazine, adding, “The ‘I’ll never do it again’ defense has probably never worked in a courtroom, but it was a good-enough promise for U.S. regulators in the case of HSBC’s money laundering activity … let’s just call the world’s biggest, most systemically important financial firms what they are: Immune.”

  “It is a dark day for the rule of law,” wrote The New York Times, in an unusually pointed editorial. “… Clearly, the government has bought into the notion that too big to fail is too big to jail.”

  Even high-ranking former prosecutors were appalled. “The message this is sending is if you want to engage in money laundering, make sure you’re doing it within the context of your employment at a bank,” former assistant attorney general Jimmy Gurulé said. “And don’t go small. Do it on a very large scale, and you won’t get prosecuted.”

  “It’s essentially telling the executives in these institutions crime pays,” said Neil Barofsky.

  But for all the criticism, and despite Breuer’s odd performance at the HSBC presser, the actual policy that had guided the decision was still semidisguised. It would not be formally unveiled until a week later, at the next outrageous settlement, this one involving the Swiss banking giant UBS for its part in a worldwide price-fixing scandal known as the LIBOR affair.

  The presser announcing this extraordinary nonprosecution came just five days before Christmas 2012, and it hit an amazing new low in the annals of public groveling before a rich and powerful company.

  Involving thousands of transactions, hundreds of individuals, and somewhere between nine and sixteen of the world’s biggest banks, the LIBOR affair at the heart of the UBS settlement was, numerically speaking, probably the biggest financial scandal ever. At the time, it was both the biggest antitrust case and the biggest price-fixing case ever to surface (some serious competitors have since reared their heads). By working together to rig global interest rates through their manipulation of the London Interbank Offered Rate—a projection of the rate at which banks charge one another to borrow and lend money—banks like UBS, Barclays, the Royal Bank of Scotland, and perhaps as many as six other companies (according to British regulators) impacted the price of hundreds of trillions of dollars of financial products, everything from mortgages to credit cards to municipal bonds to swaps and even currencies.

  British and American regulator
s had UBS officers cold. They had them, in writing, baldly offering bribes to rig rates. “I will fucking do one humongous deal with you,” begged one trader who wanted a UBS buddy to fix the rate. “I’ll pay, you know, $50,000 dollars, $100,000 dollars.”

  The anger and resentment of federal investigators toward greedy corporate criminals who inexplicably stole money when they were already rich—the anger that bled through in scenes like the Adelphia perp walk in the early Bush years—that was a thing of the past.

  The new attitude toward the white-collar criminal was perfectly exemplified by Breuer at the December 20 press conference in New York announcing the UBS deal. The head of the enforcement division bowed and scraped before UBS at the presser, all but apologizing for bringing any action at all against the Swiss company.

  In fact, there seemed almost to be a concern that Breuer would not be able to handle the public groveling job all by himself. The Justice Department therefore brought extra firepower to the announcement, as Eric Holder himself was in attendance. Breuer had the floor to start, but before long, Holder would have to step in.

  The HSBC settlement had been a deferred prosecution agreement, putting the bank under a kind of probation for five years. UBS was even worse—a nonprosecution agreement. British and American officials identified forty individuals, including eleven managers, who participated in the historic rate rigging and at least seven more senior executives who knew what was going on. They also found that “certain UBS managers and senior managers” in the bank’s Group Treasury, which oversees finances for the entire company worldwide, had repeatedly told subordinates to “err on the low side” in setting interest rates, a practice that caused the market’s view of UBS’s health to be systematically overinflated.

  For this incredibly serious crime, which had consequences for nearly every person in the world who has money or buys or sells anything, and which makes the shenanigans at Abacus Federal Savings Bank seem like kindergarteners whispering during naptime, the UBS parent company completely escaped prosecution. Its Japanese subsidiary was allowed to plead to a single felony count, while two former UBS employees were charged with crimes. But the parent company was affirmatively nonprosecuted and let off with a $1.5 billion fine. The bank didn’t have to admit to anything in the deal, except the need to pay the government money to go away.

  After the travesty of the HSBC settlement, reporters at the UBS presser were actually hostile from the start. They were all over Breuer the instant he opened the floor for questions. The first thing he was asked was why there was no indictment. Breuer sighed at the question.

  “There are many factors,” Breuer said. “… Looking at the severity of the conduct, looking at the collateral consequences, we think we arrived at a very robust, very real, and very appropriate resolution.”

  There was that word “robust” again. Another reporter wanted to know why UBS got off scot-free, given that it was a repeat offender that only a few years ago had been whacked in a major tax evasion case.

  “This bank was previously—I mean, you had brought a case with regard to their behavior on tax evasion in 2009,” the reporter asked. “This is a bank that has broken the law before. So why not be tougher?”

  Breuer shrugged and delivered the first of many extraordinary quotes that would come out of his mouth that day.

  “I don’t know what tougher means,” he said.

  Reporters kept pressing him: Why couldn’t he be tougher?

  “Our goal here,” he said finally, “is not to destroy a major financial institution.”

  How would a criminal plea do that?

  “I’m not saying that,” Breuer said.

  Well, then, what are you saying?

  “In deciding how you’re going to pursue an institution,” Breuer said, “you have to at least evaluate whether or not innocent people might lose jobs or there might be some sort of a collateral event.”

  What collateral event? What the hell are you talking about?

  “It’s not so much that we were worried about any one thing,” Breuer went on. “We’re trying to figure out what was the appropriate resolution.”

  The crowd of reporters was getting restless by now—Breuer was losing control. At this point, Holder tagged Breuer out of the ring, smoothed his tie, and stepped to the lectern.

  Thirteen years after authoring his Collateral Consequences memo, Holder was finally going to explain it, out in the open, to the entire world.

  “I’m not talking about just this case, but in others that we have resolved, the impact on the stability of the financial markets around the world is something that we take into consideration,” Holder began.

  The room was suddenly very quiet.

  “We reach out to experts outside of the Justice Department to talk about what are the consequences of actions that we might take,” Holder explained, “[and] what would be the impact of those actions if we wanted to make a particular prosecutive [sic] decision or determination with regard to a particular institution.”

  The crowd of reporters listened in stunned silence to this speech.

  “So that,” Holder concluded, “factors into the kinds of decisions that we make.”

  The attorney general of the United States had just admitted, in front of a room full of reporters, that he asks Wall Street for advice before he prosecutes Wall Street.

  Holder then went on and, finally, pointed all the way back to 1999.

  “It started back when I was the deputy attorney general. It was called the Holder memo then. It’s gone through a number of iterations since then.… I think we have to understand, though, what has happened today is that UBS—UBS has been charged criminally. Now, we can parse that if we want to.”

  But UBS itself had not been charged criminally. Only UBS Japan had been. Apparently that was what he meant by “parsing.”

  Moreover, Breuer’s and Holder’s comments together suggested a significant expansion of the ideas in the original Holder memo. While the 1999 paper was restricted to a discussion of when it might be appropriate to avoid filing criminal charges against a systemically important company, the policy now seemed to have expanded to include individuals at those companies.

  This was a radical departure. In a way, the original Holder memo had some sense to it. Unless a company was corrupt through and through, it did seem reasonable to try to avoid destroying it and to protect the jobs of innocent employees if possible. This was certainly an appropriate area to think about using prosecutorial discretion.

  But what Breuer and Holder were saying at the UBS presser made no sense at all. How would arresting executives for serious crimes affect “innocent victims”? It wasn’t as though hauling away a few dozen rate fixers at UBS, or a few especially guilty money launderers at HSBC, would lead to the destruction of those firms.

  These were massive companies, massively capitalized, and they had regulators in a dozen countries ready to help them through any transition that would be necessary.

  Collateral Consequences was out of the bag. After years and years of mysterious nonprosecutions and expertly negotiated cost-of-doing-business fines, we finally had the policy it all led to.

  And once it was out, it seemed that the Justice Department was anxious to make sure that the public understood that it was no slip of the tongue. After HSBC and UBS, both Breuer and Holder took Collateral Consequences on a kind of public relations tour, beginning with an episode of PBS’s Frontline that aired a few weeks after the UBS settlement, in January 2013.

  In that show, Breuer gave a detailed interview on the subject. “In any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts,” he said. “Because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect … if it creates a ripple effect so that suddenly counterparties and other financial institutions or other companies that had nothing to do with this are affected badly, it’s a factor we ne
ed to know and understand.”

  Breuer was here repeating Holder’s mantra that before moving against an industry target, the Justice Department essentially had to ask industry experts for advice. He was also now expanding the possible collateral consequences to include a “ripple effect” that would impact the whole economy, including innocent victims not just within the target firm, but perhaps also in other firms as well. If we press charges, in other words, we just don’t know what might happen—to everybody! We were now officially in the realm of an Edward Lorenz “butterfly effect” theory of crime fighting: a single indictment might be felt all the way around the world, and forever.

  This interview startled even the most hardened observers of politics in Washington. Two U.S. senators, Republican Chuck Grassley of Iowa and Ohio Democrat Sherrod Brown, were so appalled that they sent Holder a letter demanding an explanation for Breuer’s Frontline interview.

  It didn’t take long for them to get their answer. In early March 2013, Holder appeared before the U.S. Senate and trotted out Collateral Consequences formally, adding that the sheer size of the companies in this postcrisis, too-big-to-fail environment essentially tied his hands.

  Grassley told Holder he couldn’t recall any high-profile prosecutions that led to “any high-profile financial criminal convictions in either companies or individuals,” and he asked Holder to explain.

  Notably, Holder pulled out Collateral Consequences as an answer to this question about not just companies but individuals. “I am concerned that the size of some of these institutions becomes so large,” he said, “that it does become difficult for us to prosecute them.”

  Holder during this Senate hearing did not mention that he had come up with this idea fourteen years earlier, long before too-big-to-fail was even imaginable.

  He went on. The problem comes, he said, “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.”

  This was a variation on Breuer’s “butterfly effect” interview. We just don’t know what will happen if we press charges, so … let’s not. It was a stunning series of admissions. Even Barron’s was appalled. “The nation’s chief law-enforcement official admitted the decision to prosecute depends not on the law, but the impact on the financial markets,” wrote columnist Randall Forsyth.