Credit Suisse and BNP Paribas Will Remain Too Big To Fail

Today’s New York Times leads with some news that maybe, just maybe, ‘too big to fail’ for major Wall Street banks could become a thing of the past. Prosecutors are nearing criminal charges against Credit Suisse and BNP Paribas (while of course taking very, very careful baby steps to make sure that these criminal penalties would not have drastic impacts). The crimes of these banks? In BNP Paribas’ case, it’s processing transactions involving Sudan and Iran. In Credit Suisse's case, it’s offering tax shelters to Americans. 

Now, these may very well be crimes worthy of scrutiny and punishment. And it does matter that these could produce the “first guilty plea from a major bank in more than two decades.” 

But what an observer could conclude from the Times coverage, given the breathless excitement, is that these charges could actually have an impact on the structural problems that cause financial crises. That’s not the case. 

Here’s the real issue: why has the market been able to get to the point where the practices that actually cause catastrophic amounts of systemic risk are completely and utterly legal? 

Michael Lewis’ recent blockbuster Flash Boys has brought high-frequency trading into mainstream consciousness, and details well how high-frequency trading, just like sub-prime mortgage securitization before it, had “created new risks [in which] lay some future calamity.”  But what Michael Lewis leaves out of Flash Boys is just why everything detailed in the book is essentially legal.  He makes a few notes here and there about how regulators don’t even clearly understand what they should be regulating, but he doesn’t cover just how it is that, even after Dodd-Frank, the “too fast to fail” practices on Wall Street remain untouched, not just because prosecutors are lazy or don’t know where to look, but because there’s nothing illegal about the practices of high-frequency trading.

To answer this, we need to look at the ‘Banking Caucus’ of Congress— where the dispute is over “whether to give the banks everything they asked for, or whether to give them even more.” The financial sector has donated two-and-a-half times more than the next-most-generous sector to congressional candidates so far this election cycle— $149 million, according to the Center for Responsive Politics. 

Let’s not be fooled—we have to break this 'financial-political complex' in order to re-regulate Wall Street. Charges like the ones against BNP Paribus and Credit Suisse won't end ‘too big to fail’, and they don’t even start to contemplate how to get in front of ‘too fast to fail’. It may very well be that it’s worth the energy of prosecutors like Preet Bharara to go after tax shelters in Switzerland and dealings with Sudan. But these charges won't impact Wall Street’s own assessment of the practices that caused the last financial crisis and could cause another one, which could start at any moment—and prove too fast to stop failing.