We must hold financial firms practically accountable

Few things would be as surprising as the sight of JPMorgan (JPM) Chase & Co pleading guilty in a criminal case. Yet this could be a real possibility, if we are to believe recent news reports about the bank’s settlement negotiations with the Justice Department.

This week, for instance, the Wall Street Journal said JPMorgan may have to pay as much as $11bn (€8bn) and plead guilty to a criminal charge to settle a Justice Department investigation of the bank’s sales of mortgage bonds several years ago. The markets’ reaction? Yawn.

Perhaps a criminal case against a major US financial institution wouldn’t be such a big deal after all, especially if resolved swiftly.

It may come down to outside perceptions of the government’s intent. If prosecutors show they are determined to put a firm out of business — say, by getting an indictment and pushing to strip its licenses — investors, customers and counterparties would understandably react harshly.

Not every case has to be this way. Even a settlement that includes a guilty plea could be designed to have few collateral consequences, as long as the bank’s regulators go along.

“The question is always going to be: Are they going to be debarred? Is there a chance they could lose their banking charter as a result of a conviction?” says Brandon Garrett, a University of Virginia law professor who is working on a book about corporate prosecutions.

“If a settlement could be structured the right way, a guilty plea could work in terms of punishing the company without destroying it.”

Let’s assume that the Justice Department unveils a deal one day in which a big bank agrees to plead guilty to a felony count of some sort. It pays a fine, maybe gets some probationary period as part of its sentence, but doesn’t lose its ability to do business because prosecutors secure cooperation from the bank’s regulators. Waivers are obtained, if necessary. And the government makes a point to tell depositors not to worry.

The public would shrug. There may be reputational damage for the bank, but probably no more than the harm done by the conduct itself or by a typical deferred-prosecution agreement.

Something important would be accomplished, too: It would disprove the popular notion that it’s impossible to prosecute a large US financial-services company without killing it.

This isn’t to say charges are warranted against JPMorgan, only that the government taboo needs to end someday with somebody. Prosecutors should have plenty of opportunities — if not with JPMorgan, then with another major US bank.

Companies can’t be put in jail, of course. And, as Garrett put it to me: “You can’t actually hold a company morally accountable.” The goal is to hold it practically accountable.

If a firm commits fraud in the course of selling cockamamie securities to widows and orphans, the fact that it isn’t a natural person shouldn’t immunise it.

The government criminally charges corporations all the time, especially for antitrust and environmental crimes — just not big banks. In March, US attorney general Eric Holder told the Senate Judiciary Committee, in essence, that some financial institutions are indeed too big to prosecute because of the damage to the economy that might ensue.

That long has been the conventional wisdom. Yet Holder’s comments drew a backlash. Justice Department officials have begun talking a somewhat different game lately.

“All prosecutors around the country should be thinking a bit more about institutions, not just individuals, because sometimes that’s how justice is ultimately done,” US Attorney Preet Bharara of New York said last week.

Jonathan Weil is a Bloomberg columnist.