Obama Nails The Criminals At Credit Suisse-Part 2

May.20.14 | About: Credit Suisse (CS)

Summary

Credit Suisse gets nailed.

Credit Suisse failed to cooperate with Obama's Justice Department.

Credit Suisse Teflon CEO appears to survive.

Credit Suisse Group AG (NYSE:CS) has agreed to a felony guilty plea to settle a mammoth tax-evasion case. The bank faced prosecution for helping wealthy Americans avoid paying their taxes. The guilty plea and the $2.5 billion fine is an unprecedented victory for Obama's prosecutors and bank regulators.

President Obama's chief sheriff, Eric Holder, said that "This case shows that no financial institution is above the law". The bank's Teflon CEO, Brady Dougan, said that "We deeply regret the past misconduct that led to this settlement."

The bank will pay a $2.5 billion settlement, including paying the Department of Justice $1.7 billion and United States banking regulators $700 million. The Federal Reserve will get $100 million, and the New York State Department of Financial Services will receive six times more--$600 million.

Banks Unofficial Immunity Revoke

Prior to this landmark case, megabanks were considered "too big to fail and too big to jail." Prior to this landmark case, big banks were considered too crucial to the economic stability of a country to prosecute.

Revoking a bank's charter would do more than force the bank to go out of business… it would also cause a ripple effect on employment within the banking industry, as well as affect the currency flow within the national economy. Other than a few minor penalties, they were able to flaunt regulatory standards and national laws with relative impunity.

Guilty Plea A Gamechanger

For more than 20 years, megabanks like Credit Suisse have been able to evade admitting to any criminal wrongdoing. A guilty plea was unheard of in the banking industry. Not only were banks huge, but they were also interconnected. It was not possible to hold a billion-dollar bank accountable without affecting the other banks that it did business with on a regular basis.

Regulators were hamstrung; the banks were immune from serious accountability. Federal prosecutors were equally helpless when banks decided to stretch legal standards in pursuit of profits.

Credit Suisse was able to help thousands of ultra-wealthy American account holders hide their considerable assets under conditions of anonymity. Tax evasion was merely considered business as usual.

Now, after Judge Rebecca B. Smith accepted the guilty plea from Alan Reifenberg, the lawyer for Credit Suisse, in a 45-minute hearing, the banking world has changed beyond recognition. The Swiss bank, which has a giant investment division in New York, has agreed to one count of assisting wealthy Americans with tax-evasion. Besides the hefty financial penalty, the bank has agreed to hire an independent monitor. This monitor will oversee regulatory standards within the bank for two years.

After the guilty plea, the United States of America's Attorney General, Eric Holder, said that no financial institution was above the law, regardless of its size, wealth, or global connections. Credit Suisse, like any other bank, could not continue to help US citizens to create offshore accounts for the purpose of tax evasion.

Benjamin M. Lawsky, the New York State's banking regulator, agreed not to revoke the bank's charter to operate in the United States, because it had agreed to cooperate in full measure with the government.

Until now, Swiss banking laws that guaranteed anonymity and secrecy to account holders, part of the very fabric of that country's financial infrastructure, allowed wealthy Americans to dodge US tax codes.

The only other case of this magnitude, where a major bank with a global reach had been made accountable for its violation of national laws, was in 1989, when prosecutors extracted a guilty plea from Drexel Burnham Lambert.

Final Thoughts For Shareholders

The successful prosecution of Credit Suisse will now make it much more difficult for megabanks to avoid federal prosecution.

France's biggest bank, BNP Paribas, is expected to plead guilty in the near future for doing business with countries blacklisted by the United States. BNP Paribas may have helped Sudan and Iran with their banking needs. Other major banks are also scheduled to be held accountable, now that prosecutors have figured out a formula for making big banks pay heavy penalties without forcing them out of business.

As we recently discussed here in our recent article on this huge accomplishment by Obama's team, Credit Suisse shareholders should take profits in Credit Suisse and sell some of their holdings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.