Since the recent financial
crisis and housing collapse, some of Wall Street’s biggest banks have
faced fines from regulators reaching into billion-dollar territory. In
the latest news, JPMorgan Chase is looking at $11 billion in fines for
pushing crap mortgage securities on unwary investors.
That sounds
like a hefty amount of cash—it’s about the gross domestic product of
Kenya, and tops that of Iceland and Bahrain. As journalist Pat Garafalo
has noted, $11 billion is equal to what all the major banks
.
The sum would be the largest single financial fine in history, if in
fact it ever is paid (JPMorgan Chase is reported to be in negotiations
that might reduce it).
Investigators
from the SEC, the U.S. Justice Department, a smorgasbord of state
governments, and other regulatory agencies have been fining financial
institutions for everything from concealing risky products, to illegally
kicking soldiers out of their homes, to trying to scam bailout money.
The SEC has a list of firms whose activity “led to or arose from” the financial crisis on its
.
It tells you what they have been charged with, what fines have been
sought and what has been paid. The list is pretty long. Here’s just a
small sample of the 161 entities and individuals charged for a grand
total of $2.73 billion collected so far in settlements:
- Citigroup: The
SEC charged the company and two executives with misleading investors
about exposure to subprime mortgage assets. Citigroup paid a $75 million
penalty to settle charges, and the executives also paid penalties.
- Bank of America:
Charged with misleading investors about billions of dollars in bonuses
being paid to Merrill Lynch executives at the time of its acquisition of
the firm, and failing to disclose ginormous losses that Merrill
sustained. BofA paid $150 million to settle charges.
Now,
keep in mind that so far we’re only talking about the SEC, which deals
with various kinds of market scammers like inside traders, accounting
fraudsters, and crooks who dupe investors.
If you start going
through all the various agencies and the frauds they deal with, you may
feel as if you’ve plunged into the 9 Circles of Financial Hell.
The U.S. Commodity Futures Trading Commission has its own
list of enforcement actions,
which covers hustlers who screw around with futures and option markets.
Then there’s the Consumer Financial Protection Bureau, which deals with
jerks who rip off consumers with products like
credit cards and criminals who take kickbacks that raise prices on things like
mortgage payments. Over at the Department of Justice, they watch out for your
price-fixers, your
rate-riggers, and your
money launderers.
The Office of the Comptroller of the Currency handles swindlers of the
sort who steal your financial info and make up phony investment
programs, along with debt collectors. And so on.
There’s a good
bit of overlap between regulators, and when there’s a big scam afoot,
several agencies will often file suit against the same company.
Where does the money go?
That’s
the billion-dollar question. Regulators love to brag about all the
money they extract from financial transgressors, which comes in the form
of various fines and “disgorgements” (returns of wrongful profits) to
settle charges.
But does the money go to victims? Does it end up
in the Treasury? Do regulators use it to fund more investigations? Buy
snazzy new furniture for the office? The answers are not always easy to
come by.
Let’s take a look at JPMorgan. This year alone, the megabank has paid
$3.68 billion to settle various criminal probes into
stuff ranging from manipulating electricity markets to ripping off
credit card customers. A big fish was the “London Whale” debacle in
which over $7 billion vanished due to risky derivatives bets
.For its failed risk management and unsafe practices related to that Moby Dick of a f*ck up,
JPMorgan is settling for $920 million.
Out of that particular amount, $200 million will go to the SEC, and
another $200 million to the Federal Reserve Board. The Office of the
Comptroller of the Currency will receive $300 million, while the British
regulator will get $220 million.
And we still haven’t gotten to
the $11 billion whopper JPMorgan may have to pay out to end
mortgage-bond investigations by federal and state authorities. That lump
sum would presumably take care of all of the charges and would
reportedly include $4 billion for relief for people who lost their
houses and so on. The rest would go to pay various penalties. Where that
$7 billion or so ultimately goes depends on what agency you’re talking
about, and the particulars of the case.
I contacted the Department
of Justice to find out how it handled fines, and no one returned my
messages. (Perhaps during the shutdown, justice has been put on hold—or
maybe that already happened when Attorney General Eric Holder
admitted that banks had gotten too big to jail.) In any case, a former DOJ officer, Billy Jacobson, has
gone on record as
saying that the fines don’t pay for coffee and donuts for
investigators. Instead, the money has to go the U.S. Treasury.
Restitution for victims is rare, and constitutes a trivial amount of
what the DOJ brings in. In 2011 the DOJ took in $2 billion in judgments
and settlements, and
only $116 million went to restitution.
At
the SEC, I got hold of a spokesperson who tersely informed me that
money collected from fines does not ever come back to the agency, but
rather goes into the Treasury’s general fund. Anything else would
violate the agencies’ statutes.
The Sarbanes-Oxley Act of 2002 also directed the SEC to create something called the
Fair Fund,
which in some cases, distributes monies collected from fines and
disgorgements to investors. So if you invested in a company like, say,
Enron, you might end up seeing some of your money returned, though
rarely all of it, and the process can take years. If you happen to own
stock in a company or owned a mutual fund that has been charged by the
SEC, you can check the
SEC website to
see if there’s a settlement fund. Only a small portion of what’s in the
Fair Fund has been returned to investors, so don’t hold your breath.
Some
have complained that money from fines goes back to the regulatory
agencies to launch further investigations, which creates a parasitic
relationship between regulators and those they pursue. Barry Ritholtz of
the Big Picture was recently
quoted in Yahoo Finance on this point:
“Only a portion of the settlements collected go to the actual victims,”
stated Ritholtz. “For the most part the money is used to fund more
investigations.” When I asked him for particulars, Ritholtz first told
me to “Google it” but when I pressed him, he sent me the SEC’s
156-page financial report from 2012.
When I read over this bloated document, it seemed to contradict
Ritholtz’s statement. Perhaps he sees something in 156 pages that I
don’t —alas, he did not respond to further inquiries.
I continued
my quest to follow the money by calling up the Consumer Financial
Protection Bureau. The folks at the CFPB were the most helpful so far,
and explained that when the bureau collects civil penalties, it drops
them into something called the Civil Penalty Fund, which was established
by the Dodd Frank legislation in 2010. The bureau will use the money in
the Civil Penalty Fund to provide some compensation to victims, an
amount which depends on various factors such as how much the victim has
gotten from other sources. When the CFPB can’t find the victim or
determines, for whatever reason, that it’s not “practicable” to pay
them, the money goes to “consumer education” and “financial literacy
programs.” That last bit is a little vague.
In the end, we seem to
have a large chunk of money from fines and penalties going to the U.S.
Treasury, which, if you’re a deficit hawk, ought to cheer you. But the
amount going to victims, though on the rise, still appears to be
inadequate.
Case in point: 10 megabanks, including Citi, JPMorgan Chase, and Bank of America, will have to fork over
$3.3 billion in direct payments to
customers who were in foreclosure during 2009 and 2010. That adds up to
about $125,000 for each person who was foreclosed on even though they
were up to date with their mortgage payments. Does that amount really
cover the horrific cost of being kicked out of your home, losing equity,
and all the other costs and inconveniences that go along with such a
cataclysmic disruption? Some victims are
saying no, it doesn’t, by a long shot.
Who pays the fines?
Technically,
the banks or financial entities charged pay the fines. Much has been
made of an aspect of corporate tax law that allows companies to write
off disgorgements when they pay Uncle Sam. The
Washington Post reports that the law lets the companies off the hook for millions of dollars in tax payments.
Some bloggers have
leapt to the idea that a big bank can write off fines, but that is not
true at all, because fines are not the same thing as disgorgements.
Here’s
how disgorgement works: If you’re a crook and you get your money from
illegal activity you then pay taxes on, what you’ve really done is
inflated your income and assets to the government because that money
actually didn’t belong to you in the first place. If disgorgement
happens, then you have to hand over the money you made from your shady
activity. From a technical accounting perspective, you shouldn’t be
taxed on the money because it was never yours, and the taxes you paid
must be returned. This obviously doesn’t sit well in the gut for many
folks, but instead of arguing this particular point, perhaps what we
should really be doing is insisting that the fines should be much
bigger—because right now, they aren’t big enough to hurt.
The
banks are very clever about things like fines, and in some cases, they
actually have ways of making you pay for them. When HSBC got hit with a
giant money-laundering fine, customers got letters soon after noting
certain “changes.” HSBC, for no reason it cared to explain, would be
taking longer to deposit monies into accounts. What the bank was really
doing was increasing the “float,” or soaking up interest on the money in
between the time you deposit a check into your account and the moment
it shows up there. Was there any link between the money-laundering fine
and what happened to your account? Makes you wonder. It did not make the
Federal Reserve wonder, though.
What if you decided to go after a bank yourself for harmful activity? Alexander Eichler at the Huffington Post has
pointed out that there’s
some very interesting fine print on fines buried way down in the
terms-and-conditions agreements you have to sign when you open a bank
account with big names like HSBC, TD Bank, and PNC Bank. Basically, if
there’s any legal disputes over your account, and the bank has to fork
over any fees, like attorney fees and so on, you get to pay them. In
other words, if you sue your bank over a credit card dispute, you may
have to pay for the bank’s losses, even if you win.
Here’s HSBC’s
clause: “You agree to be liable to the bank for any losses, costs or
expenses the bank incurs as a result of any dispute involving your
account. You authorize the bank to deduct any such losses, costs or
expenses from your account without prior notice to you.” The
LA Times reports that though the practice is on shaky legal ground, what it’s really intended to do is
scare consumers out of taking a bank to court.
Such is the peculiar reality in our banks-gone-wild universe.
In
fact, taxpayers are paying for big banks to make all those heady
profits and enabling their bad behavior through our subsidies. The
megabanks can borrow money at a lower rate because creditors assume the
government, on behalf of taxpayers, will come to the rescue in an
emergency. Ironically, this subsidy only encourages them to engage in
more risky behavior, for which we all end up paying.
What’s the goal of the fines, anyway?
Good
question. Nobody really seems to know. In theory, disgorgements are a
remedy for misdeeds, whereas fines are a punishment. But the punishment
in many cases does not fit the crimes, which have wreaked havoc on the
entire economy and caused job losses, vanished savings and pensions, and
lost homes for millions of blameless people. Fines may sometimes force a
company out of business, but most of time, those paying the big bucks
barely bat an eye.
In case you hadn’t noticed,
bank profits are up.
Despite JPMorgan’s potential $11 billion hit, the company stock has
barely registered the fine.
Maybe that’s because the fine, though large, would only amount to about
two quarters worth of profits. Or because no one really believes a sum
like that will ever be paid.
In any event, banks like settlements
because they save a lot of hassle. Settling matters outside of the court
system means that they usually don’t have to admit wrongdoing, they
save money on legal fees, and they avoid juries, which may be in the
mood to get a lot tougher on them than your friendly neighborhood
regulator. This is true not just for banks, but all across the corporate
sector. Big Pharma has gotten hit with
big fines, too, for things like fraudulent marketing practicies. Hasn’t slowed them down a bit.
I
spoke to banking expert Walker Todd of the American Institute for
Economic Research, and he noted that though there has been a movement to
get banks to at least
admit wrongdoing when
they settle, these admissions typically fall short of owning up to
criminal guilt. When firms admit to criminal guilt, then they are open
to lawsuits, and if they end up in court, they can’t deny what they’ve
already admitted as facts.
Until they are truly forced to admit
their crimes, or have to pay penalties that exceed their profits, banks
have little to fear.
Are fines just the cost of doing business?
The
Obama administration has not been very eager to pursue full-blown court
cases with corporations or send executives to jail. When criminal
charges ensue, they often involve lower-level employees who take the hit
while the company and the big honchos go unscathed. The fines are paid
and everybody goes back to business as usual.
The
New York Times noted in an
editorial that
in the case of UBS, which was involved in the LIBOR rate-rigging
scandal, a subsidiary got hit with a $100 million fine and two former
traders of various criminal acts could wind up in jail. Sounds
good—until you realize, as the
Times observes, that a
“subsidiary’s plea on a single criminal charge appears to shield the
parent company and the prosecution of two traders appears to shield
their managers.”
In other words, crush the small fry and let the big fish go.
What
is clear is that fines, even the biggest ones, do little to deter
criminal activity. Big banks appear to be simply calculating fines into
their business models: fines, after all, don’t exceed profits, and in
this scenario, what do you think the incentive is for banks to cease
their fraudulent and criminal activity? If you answered, “none
whatsoever,” you are likely correct.
Bank fines are simply baked
into financial business. Until fines are much, much bigger and
perpetrators at the top face the possibility of prosecution, the crime
spree will go on.
If somebody broke into your home and stole your belongings, you’d
expect to see some serious consequences if they got caught. But when
banks and financial firms rob, defraud and mismanage the money of
Americans—and even cast them out of their own homes illegally—the worst
that usually happens is a fine.
