If a kid does something bad and you want to discipline him — give him a timeout, say, or take away a toy — there are some basic principles that seem to work.
The punishment needs to happen quickly after the bad behavior. And it needs to be significant enough to get noticed. Those rules aren't just for kids; they need to hold true for any type of punishment to be effective.
But if you're a federal regulator punishing a bank, it can be tough to be swift enough and to levee a penalty that's severe enough to make a difference.
Take HSBC, the bank that just agreed to pay the U.S. government $1.9 billion to settle allegations that it laundered money for Mexican drug dealers.
The bank's dealing with the drug dealers took place over a decade.
"This is justice very much delayed, and that may be to a degree justice denied," says John Coffee, a law professor at Columbia and an expert in prosecuting white-collar crime.
Simply punishing the corporation, years after the crime, might not send the message you want, according to Coffee.
"The taking of billions of dollars in cash from Mexican drug cartels and funneling it into the U.S. into legitimate investments, that was done by individuals who knew what they were doing, and no one has been held accountable who is a flesh-and-blood human being," Coffee says.
Then there's the amount of the penalty.
"These fines are large from the perspective of you and me," says William K. Black, a former federal regulator. "From the perspective of the institution, they are simply a cost of doing business."
Black points out that the $1.9 billion fine amounts to about one month of profits for the bank.
There was something that the federal government could have done to punish the bank that really would have hurt: It could have indicted HSBC for laundering money for drug cartels. It could have revoked HSBC's federal insurance and made it impossible for the bank to operate in the United States.
But Lanny Breuer from the Justice Department says the government didn't want to punish all of the innocent people who worked for the bank who would lose their jobs. He said when he announced the settlement this week that HSBC had cleaned house, was promising to have more oversight and was cooperating.
"We've gone after the cartels, we've gone after the traffickers," Breuer said. "And in this particular case, we have held a financial institution absolutely accountable."
But is $1.9 billion enough of a punishment to make all the other banks take notice? Will it scare bank managers out of doing business with shady clients?
Clearly, no institution wants this kind of bad publicity. But in the past, Coffee says, the lessons that really shook up industries involved criminal indictments, not just money.
Decades ago, for example, junk bond king Micheal Milken was charged with insider trading and went to jail.
"I think that sent a message for a decade to Wall Street that this was very dangerous behavior — don't go anywhere near it," Coffee says. "And I think that message was internalized. I think most people did understand and did obey that norm."
HSBC agreed to pay money, sure. But the settlement was over quickly. So far, even the stock price is holding steady.
Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department, that made the decision to defer prosecution of HSBC.
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Transcript
DAVID GREENE, HOST:
When a bank does something shady and gets caught, prosecutors like to hit the bankers where it hurts: their pocketbook. This week the bank HSBC agreed to pay the U.S. a record $1.9 billion to settle allegations it ignored money laundering by Mexican drug dealers.
Robert Smith, from our Planet Money team, wonders whether the money alone is enough to teach banks a lesson.
ROBERT SMITH, BYLINE: If a kid does something naughty and you want to discipline the child - give him a time-out, say, or take away a toy - there's some basic principles that seem to work. The punishment needs to happen quickly right after the bad behavior. And it needs to be significant enough that the kid notices. But punishing a bank makes both of these things incredibly tricky.
In the case of HSBC, their dealings with Mexican drug dealers took place over a decade.
JOHN COFFEE: This is justice very much delayed, and that may be to a degree justice denied.
SMITH: John Coffee is a law professor at Columbia University and an expert in prosecuting white collar crime. He says that simply punishing the whole bank, the corporation, years after the crime may not send the message that you want.
COFFEE: The taking of billions of dollars in cash from Mexican drug cartels and funneling it into the U.S. into legitimate investments, that was done by individuals who knew what they were doing, and no one has been held accountable who is a flesh and blood human being.
SMITH: So that's the first problem in levying a fine against the bank. Who really has to pay the money at the end of the day? The corporation, or more specifically the shareholders - not exactly the specific wrongdoers getting what they deserved. Then there is the amount of the penalty. $1.9 billion is a lot of money, no doubt about it. But when you break it down, it's hard to know how much this really hurts a bank.
WILLIAM K. BLACK: These fines are large from the perspective of you and me, and from the perspective of the institution they are simply a cost of doing business.
SMITH: William K. Black is a former Federal regulator. He now teaches economics and law at the University of Missouri, Kansas City. He points out that HSBC makes a lot of money, and $1.9 billion works out to about a month's worth of profit for the bank, based on what they were pulling in at the beginning of the year.
Black says that the settlement was negotiated between the bank and federal prosecutors and it was important for both sides that it not be unbearably high.
BLACK: The government dramatically reduces from the beginning what its demand would be, because we don't want to put HSBC out of business, and so we're going to cap the demands from the very beginning.
SMITH: See, there was something that the federal government could have done to punish the bank that really would have hurt. They could have indicted HSBC for doing business with drug cartels, made it very difficult to operate in the United States. But Lanny Breuer, head of the Justice Department's criminal division, says they didn't want to punish all the innocent people who worked for the bank who would lose their jobs.
When he announced the settlement this week, he said that HSBC had cleaned house, they were agreeing to more oversight, and were cooperating.
LANNY BREUER: It's a fiction to suggest that this isn't a very robust result. We've gone after the cartels, we've gone after the traffickers. And in this particular case we have held a financial institution absolutely accountable.
SMITH: But is $1.9 billion enough of a punishment to make all the other banks take notice? Clearly, no institution wants this kind of bad publicity. But law professor John Coffee says in the past the lessons that really shook up entire industries usually involved criminal indictments, not just money. He points to Michael Milken in the 1980s. He was the king of the junk bonds until he was charged with insider trading.
Everyone knew him on Wall Street and when he eventually made a deal and went to jail...
COFFEE: That sent a message for a decade to Wall Street that this was very dangerous behavior, don't go anywhere near it. And I think that message was internalized.
SMITH: Coffee says the thing that made the lesson stick was the fact that Milken was this iconic figure who was personally humiliated. No Wall Street trader wanted to be in that guy's shoes. HSBC, they agreed to pay money, sure. But the settlement was over quickly and investors don't seem to mind. So far the stock price is holding steady. Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright NPR.
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