Only jailing lawbreakers can contain corruption on Wall Street, a top Federal Reserve official said Thursday.
“There’s no substitute for punishing and seriously punishing individuals who have transgressed the law,” Federal Reserve Governor Daniel Tarullo said Thursday in a question-and-answer session at the Council on Foreign Relations in New York.
Tarullo’s remarks add to a series of recent comments by Fed officials sounding a tough tone on Wall Street practices, even as the central bank has come under criticism from lawmakers and others who are concerned about the lack of prosecutions at banks involved in fraud during and after the financial crisis.
Tarullo, who is the Fed’s point man on matters of financial regulation, suggested that prosecuting lawbreakers is the way to maintain order within the finance industry.
Referring to the antitrust cases of the 1960s, Tarullo said that “the watershed moment was the moment when … some executives went to jail. Within a very short period thereafter, every major corporation in the U.S. had a very robust antitrust compliance program.”
Such self-regulation is not the case in the financial system today, he suggested. Rather, there is a culture of permissiveness.
“Once you’ve had the issues around consumer protection — or lack of protection — over a number of years, when you’ve had the LIBOR problems, when you’ve had the FOREX problems, it’s difficult to say, ‘Gee, we just have a few bad apples down there somewhere,’ ” he said, referring to recent fraud cases involving mortgages and interest rate and exchange rate fixing cases.
Regulating the “culture” of a firm, he added, would be impractical. But the Fed can regulate the “output” of firms, stepping in when there are repeated problems and bar executives from the industry, if not refer to the Department of Justice for prosecution.
His statements Thursday were among his toughest yet and seemed to go beyond recent similar statements from Chairwoman Janet Yellen and Vice Chairman Stanley Fischer.
The Fed and other agencies have come in for criticism from populist members of Congress, such as Sen. Elizabeth Warren, D-Mass, for not pursuing prosecutions against individuals and instead settling fraud cases by allowing banks to say that the firm, rather than executives, was guilty.
Warren grilled Tarullo in a Senate hearing in September over whether the Fed had referred any bankers to the Justice Department for prosecutions. Tarullo then would not say that it had.
