As U.S. Justice Department prosecutors angle to bring the firstcriminal charges against global banks since the financial crisis,they'll have to stare down warnings of uncontainable collateraldamage.

The 2002 collapse of Arthur Andersen, the accounting firmindicted in the Enron scandal, “should be a lesson” forprosecutors, Brad Hintz, an analyst at Sanford C. Bernstein &Co., said today in an interview on Bloomberg Television. “Don'tplay with matches.”

Stung by lawmakers' criticism that multibillion-dollarsettlements have done too little to punish Wall Street in the wakeof the financial crisis, prosecutors are considering indictments inprobes of Credit Suisse Group AG and BNP Paribas SA, a personfamiliar with the matter said. Even after talking with financialregulators about ways to mitigate damage—such as ensuring bankskeep charters —prosecutors might not fully understand consequencesfor the market, according to industry lawyers and bankers who arefollowing the case.

Bank clients—including trustees, fiduciaries, and pensionfunds—could be forced to cut ties with a financial institutionlabeled a criminal enterprise, the lawyers and bankers said, askingnot to be named because they weren't authorized to talk publicly.Counterparties also might think twice before entering intobillion-dollar transactions with such firms. Damaging a bank'sbusiness could lead to broader fallout across the financialindustry, just as Lehman Brothers Holdings Inc.'s collapse in 2008prompted investors to withdraw from other firms on concern its exitwould set off a wave of losses.

Criminal action would have to be handled so that any review of abank's charter wouldn't spook customers or revoke a firm's license,said Gil Schwartz, a partner at Schwartz & Ballen LLP and aformer Federal Reserve lawyer.

“The mere threat of requiring a hearing could cause customers tolose confidence in the institution and could cause a run on thebank,” Schwartz said.

The warnings show the resistance prosecutors face in seeking toprove global banks aren't too big and systemically important toindict. Preet Bharara, the U.S. attorney for the Southern Districtof New York, signaled in a March speech that a large financial firmwould be charged soon, despite the industry's bleak predictions offallout.

“Companies, especially financial institutions, will do almostanything to avoid a tough enforcement action and therefore have anatural and powerful incentive to make prosecutors believe thatdeath or dire consequences await,” he said. “I have heardassertions made with great force and passion that if we take anycriminal action, the skies will darken; the oceans will rise;nuclear winter will be upon us; and the world as we know it willend.”

Credit Suisse has been the target since 2011 of a U.S. criminalprobe into whether it helped Americans evade taxes. BNP Paribas hasbeen investigated for possible violations of U.S. sanctions barringbusiness with prohibited countries.

Shares of Zurich-based Credit Suisse fell 0.3 percent yesterdayto 27.91 francs after news reports on prosecutors' deliberations.BNP Paribas dropped 3.2 percent to 54.11 euros. The Paris-basedfirm said it may need to pay much more than the $1.1 billion it setaside for the U.S. sanctions case.

Spokesmen for both firms declined to comment on the prosecutors'considerations.

Limit Fallout

There are a variety of ways for prosecutors to limit damage fromcriminal charges. One option would be to force a bank's subsidiary,rather than the parent company, to enter a guilty plea, said thelawyers and bankers. The Justice Department has gone down that pathin settling charges involving the Foreign Corrupt Practices Act,which forbids U.S. companies from bribing foreign officials to winbusiness.

“I would expect regulatory discussions with these banks inquestion will avoid systemic consequences,” said Darrell Duffie, afinance professor at Stanford University's Graduate School ofBusiness in Stanford, California. “I expect the situation to becontrolled.”

Many concerns expressed by financial professionals focused onless tangible fallout, such as lost confidence in a firm. Somecompared such a situation to Bear Stearns Cos., which was batteredby doubts about its strength in 2008, leading to its emergency saleto JPMorgan Chase & Co.

Client psychology also could come into play. For example, evenif investment managers aren't prohibited from working with a bank,they may shy away because they don't want to explain why they putfunds in a firm with a criminal past.

Mindful that the specter of criminal charges helped putfinancial institutions such as Bank of Credit and CommerceInternational and Drexel Burnham Lambert Inc. out of business,prosecutors in Washington and New York have met withrepresentatives of the Federal Reserve and the Office of theComptroller of the Currency to discuss the regulatory risks ofindictments, according to two people briefed on the matter.

In the case of BNP Paribas, New York's top banking regulator,Benjamin Lawsky, isn't planning to suspend its license, a personfamiliar with that matter said earlier this week. Lawsky instead isconsidering seeking a deal that would terminate some bankemployees, claw back pay, and temporarily suspend the firm'sability to transfer money through New York branches on behalf offoreign clients, the person said.

Far-Reaching

Consequences of such a suspension could be far-reaching, becausesmaller banks around the world rely on the Paris-based lender fordollar-clearing services, lawyers and bankers said.

The Justice Department's attempt to get the Federal Reserve andOCC involved makes sense, said Samuel Buell, a former Enron TaskForce prosecutor who now teaches at Duke University School ofLaw.

“You can't do a guilty plea of a systemically importantfinancial institution without first getting the regulators on board[with] a commitment that the conviction won't put the bank out ofbusiness,” he said in an e-mail. “That seems to be going on here,not surprisingly.”

Credit Suisse and BNP Paribas may be serving as guinea pigs tosee how criminal charges affect banks, potentially paving the wayfor such claims against larger U.S. firms when they break laws,said Phillip Phan, a professor at the Johns Hopkins Carey BusinessSchool in Baltimore.

“These are test cases,” said Phan. “There's a pragmatism behindthis. You look for a target that's small enough and that will senda message.”

Prosecuting banks would break with a practice of brokeringsettlements with companies that are considered integral to thefinancial system. Previous probes were resolved through so-callednon-prosecution and deferred-prosecution agreements, which havebeen criticized by U.S. lawmakers for failing to hold banksaccountable.

“It's about time,” said Buell, who was part of the prosecutionteam at the trial of Arthur Andersen, whose indictment put about85,000 people out of work. “The argument that we can't have guiltypleas because of debarment provisions that are written into variousregulatory codes has always seemed to be a case of the tail waggingthe dog.”

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