Skip to main content

Opinion: Punish bankers not banks for crimes

By Yves Smith, Special to CNN
July 11, 2014 -- Updated 0957 GMT (1757 HKT)
French bank BNP Paribas is braced for a record fine of almost $9 billion for breaching U.S. sanctions on Iran, Sudan and Cuba.
French bank BNP Paribas is braced for a record fine of almost $9 billion for breaching U.S. sanctions on Iran, Sudan and Cuba.
STORY HIGHLIGHTS
  • BNP Paribas has been fined nearly $9 billion in fines for violations of US sanctions
  • French authorities criticized the fine as excessive and disproportionate
  • Author Yves Smith says fines such as this have only limited impact on the banks
  • Banks will not change until top executives face punishment, Yves Smith writes

Editor's note: Yves Smith is the creator of the influential financial and economics website Naked Capitalism and author of the book ECONNED: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism. The opinions expressed in this commentary are solely her.

(CNN) -- French officials exploded in outrage after BNP Paribas agreed to plea guilty to criminal charges, pay nearly $9 billion in fines, and have access to dollar clearing suspended for a year for its persistent violations of US economic sanctions against Iran, Cuba and Sudan.

The international bank fell under US jurisdiction by virtue of facilitating transactions in dollars which passed through the US.

Most financial commentators had little sympathy with the French position, since the giant bank's conduct was egregious. It included ongoing records-doctoring to hide the true identity of customers and stymieing the US investigation.

Yves Smith
Yves Smith

But the French argument was essentially political: that the US had no right to impose its will on a foreign bank, and these transactions were legal under European law.

Yet this is far from the first time the US has used its position as issuer of the world's reserve currency to advance its foreign policy agenda.

For instance, in the Suez Crisis in 1956, Britain's need for dollar credit to defend the pound enabled the US to force Britain and France to pull back from military confrontation.

The economic reality is that the US derives considerable power from its role as the issuer of the world's reserve currency and its control over dollar-based payment systems. Large banks run huge volumes of transactions with each other during the day.

They are willing to do so because these systems are ultimately backstopped by the Federal Reserve.

Perversely, while banks are wards of the state and get more support and subsidies than any other type of business, the authorities have lacked the will to discipline them effectively.
Yves Smith

While parties unhappy with America's use, and some would contend abuse, of US dollar dominance, financial institutions could set up dollar transaction mechanisms that completely skirted the US. But with low volumes and no Fed protection, they'd be vastly higher cost.

The other alternative is to try to encourage more use of non-dollar currencies, like the euro and China's renminbi.

But the euro has no benchmark bond, plus continued concerns about political fracture and sovereign bond restructurings mean it's not a contender to replace the greenback any time soon. And even though China has been aggressively promoting trade denominated in the renminbi, the volume is puny, a mere 1.5% of the global total.

But putting aside the international row, what does the BNP Paribas settlement say about addressing misconduct at too big to fail banks?

Perversely, while banks are wards of the state and get more support and subsidies than any other type of business (for instance, ZIRP and quantitative easing are massive transfers from savers to financial players), the authorities have lacked the will to discipline them effectively.

The road to the BNP Paribas fine
A record find for BNP Paribas
BNP Paribas pleads guilty

Even though the BNP Paribas fine exceeded a year of earnings, the bank's stock rose 3.6% when the deal was announced, saying that investors though BNP Paribas had done well.

The conundrum is indicting a bank at the parent level is widely perceived to be a potential death blow, since many counterparties would have to stop doing business with it immediately.

Removing the US banking licenses of a serial fraudster, another possible remedy, would similarly put a US firm out of business and would inflict severe, permanent damage on a big foreign bank. Hence the tendency of officials to rely on big, or at least big-sounding, fines.

But it is bankers, not banks, that commit crimes.

Here, the BNP Paribas deal falls short. True, 13 officers were forced to resign, including one of its chief operating officers. But he was on the verge of retirement, and more important, no one was charged criminally or fined.

By contrast, in 1991, when Salomon Brothers failed to curb a trader that was repeatedly gaming government bond auctions, Salomon's CEO, vice chairman, and president departed abruptly.

We've seen nothing like that punishment meted out to top executives in the post-crisis wave of investigations.

And until that happens, banks will continue to behave as if they have the upper hand.

Read more: Why screen stars are battling Europe's banks
Read more: Banks know that customers hate them

ADVERTISEMENT
Part of complete coverage on
August 18, 2014 -- Updated 1236 GMT (2036 HKT)
Europe's deteriorating relationship with Russia has hit the region's growth, even before new food sanctions begin to bite.
July 16, 2014 -- Updated 1634 GMT (0034 HKT)
With cyberattacks on the rise and here to stay, it's a modern-day challenge for people and businesses to get smarter about preventing them.
August 14, 2014 -- Updated 1324 GMT (2124 HKT)
Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
July 20, 2014 -- Updated 1524 GMT (2324 HKT)
Evidence points to pro-Russian separatists as perpetrators of the attack and Vladimir Putin is facing uncomfortable questions, David Clark writes.
August 5, 2014 -- Updated 1440 GMT (2240 HKT)
The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
July 3, 2014 -- Updated 0902 GMT (1702 HKT)
Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
July 18, 2014 -- Updated 1447 GMT (2247 HKT)
Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
July 17, 2014 -- Updated 1100 GMT (1900 HKT)
A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
July 16, 2014 -- Updated 1602 GMT (0002 HKT)
Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
July 18, 2014 -- Updated 2109 GMT (0509 HKT)
American burger joints have sprung up all over London, but how to know which ones are best? CNN's Jim Boulden investigates.
June 18, 2014 -- Updated 1222 GMT (2022 HKT)
Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
June 18, 2014 -- Updated 1502 GMT (2302 HKT)
At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
July 16, 2014 -- Updated 1058 GMT (1858 HKT)
Bob Mazzer has photographed inside London's Tube network for 40 years. He's captured history.
July 18, 2014 -- Updated 1712 GMT (0112 HKT)
Exotic animals are becoming a profitable business opportunity for Nicaraguan entrepreneurs. CNN's Rafael Romo reports.
June 13, 2014 -- Updated 1529 GMT (2329 HKT)
Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
June 18, 2014 -- Updated 1222 GMT (2022 HKT)
Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
June 16, 2014 -- Updated 1314 GMT (2114 HKT)
The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.
July 16, 2014 -- Updated 1058 GMT (1858 HKT)
Bob Mazzer has photographed inside London's Tube network for 40 years. He's captured history.
June 17, 2014 -- Updated 1206 GMT (2006 HKT)
The UK capital promotes its tech stars and shows it can compete with Silicon Valley. Here are five companies that pitch to make it big.
ADVERTISEMENT