Questions over ‘too big to jail’ banks in Lynch nomination

Throughout his tenure, outgoing Attorney General Eric Holder has faced criticism from lawmakers for his role in promoting “too big to jail,” or the perception that executives at big banks cannot be prosecuted for financial crimes, even after the financial crisis.

Now, Wall Street critics are concerned that Lynch, who has been involved in key bank cases as U.S. attorney for the Eastern District of New York, will perpetuate that aspect of Holder’s legacy at the Department of Justice.

Questions about Lynch’s track record on financial crimes should be “central” to her upcoming confirmation hearings, said Public Citizen’s financial policy advocate Bartlett Naylor.

Naylor called Holder’s record on banks “one of the most distressing parts of his record.”

“Under his watch, the government failed to bring any meaningful criminal prosecution against a corporation or any individual, despite his own declarations of the severity of these crimes and fraud,” Naylor said.

Lynch’s confirmation process is expected to play out early next year with a Republican majority in the Senate. A spokesman for Sen. Chuck Grassley of Iowa, the Republican who will become chairman of the Judiciary Committee, said the Justice Department’s treatment of bankers would be an “issue of interest,” but that topics had not been determined for the hearings, although financial crimes are not expected to be a top line of questioning.

Grassley, with Ohio populist Democrat Sherrod Brown, criticized Holder for failing to charge executives at megabanks with crimes in early 2013, shortly after a case in which bankers at HSBC avoided prosecution despite settling on charges of laundering money for terrorist and criminal organizations.

Holder drew even more criticism in March of that year for explaining in congressional testimony, “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.” That line was widely interpreted as a defense of a policy of “too big to jail,” even though Holder later tried to clarify and walk back his comments.

Some on the Left worry that Lynch was effectively complicit in the decision not to prosecute HSBC executives, because the case was run through her office as the U.S. Attorney for the Eastern District of New York.

“There may be people who are going to want to question her from the Left about the failure of the Holder Justice Department to go after Wall Street elites for the financial crisis,” said Sol Wisenberg, a white-collar defense lawyer at Nelson Mullins Riley & Scarborough LLP.

“That was a case where a number of people wondered why there weren’t individual prosecutions,” Wisenberg said of the HSBC settlement, noting that he was not speaking for himself. He added: “I imagine she might be questioned by the Left on that.”

Then, Lynch blamed the British-based HSBC for “the laundering of at least $881 million in drug proceeds through the U.S. financial system.” HSBC, according to federal investigators, laundered money for Mexican drug cartels and carried out transactions for sanctioned governments, including Iran, Cuba, Sudan, Libya and Burma. The bank settled with the federal government for $1.26 billion and enter into a deferred prosecution agreement with the Justice Department, but no executives faced individual charges.

Lynch’s office was also part of a July settlement between the Justice Department and Citigroup in which the megabank paid out $7 billion in fines and relief for selling faulty mortgage-backed securities to investors in the run-up to the financial crisis. That is one of several settlements criticized for the lack of action against bank executives despite the fact that the bank admitted wrongdoing.

Both those settlements were driven by Holder, not Lynch.

Nevertheless, senators should use the upcoming confirmation hearings to give Lynch a chance to say she would approach financial crimes differently from Holder, wrote Princeton political scientist Nolan McCarty in a recent post on the Washington Post’s political science blog. “Although Lynch’s public record does little to suggest that her approach to Wall Street would differ dramatically from that of Holder’s, a very productive use of the Senate’s “advice and consent” prerogatives would be to open a discussion about how to end the “too big to jail” approach,” McCarty suggested.