In mid-July, Citigroup agreed to pay $7 billion for what the U.S. Department of Justice (DOJ) called "egregious misconduct" related to its handling of subprime mortgages and mortgage securities in the run up to the financial crisis. This was not a singular result. It is part of a trifecta.
In March of this year, Bank of America entered in to a $9.5 billion settlement with the Federal Housing Finance Agency as the conservator for Fannie Mae and Freddie Mac for its alleged transgressions on mortgage securities. In addition to this, the DOJ is reported to be seeking as much as $17 billion from Bank of America to make its settlement.
In November of 2013, JPMorgan Chase made a "record settlement" with the DOJ of $13 billion for its sale of troubled mortgages.
Billions here - billions there - this adds up to real money. The question is whether it is sufficient to resolve these matters entirely. We think not given the level of harm that was done to home buyers and investors and its enduring impact.
As Attorney General Eric Holder noted in his announcement of the Citigroup agreement at news conference, the deception around these mortgages "shattered lives." Holder observed that, as the bank increased its profits and market share, "They did so at the expense of millions of ordinary Americans and investors of all types - including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities.
Consumer and public interest groups criticized this deal and the earlier ones as inadequate. Bartlett Naylor of Public Citizen stated, of the Citigroup settlement, "In the context of the damage done, the damage even described by the attorney general, we're not even in the same ball park." Simon Hodes of Lynn United for Change, a Boston area advocacy group against foreclosures declared, "Seven billion sounds like a lot but compared to the number of families that lost their homes, it is not very much at all."
We will not opine on the size of these financial settlements. We do believe, however, that no matter how large the amount these firms pay, civil action should be just part of the remedy to be pursued in these instances.
That is why we were pleased to hear Tony West, associate attorney general at the DOJ and lead negotiator on the Citigroup and the other deals, comments during an interview with Judy Woodruff of the PBS Newshour on July 14. West declared, "...this is a civil resolution. It's not a criminal resolution. And, in fact, by the very terms of the settlement agreement, we have not written off any ability to pursue criminal charges, should the evidence merit that."
Woodruff probed, "So that could still come?" To which West responded, "That's always a possibility out there."
This possibility of criminal behavior by bank executives and employees at each and all of these big banks that have reached financial settlements is one that needs to be fully investigated. And, as appropriate, criminal charges should be brought and, if they are convicted, jail time must be served.
There are three reasons for this. The first is that while the banks appear to be settling for megabucks. In the grander scheme of things and on their long term balance sheets, it's more like "chump change."
For example, Citigroup's $7 billion settlement was about 50% of its $13.7 billion profits of last year. $3 billion of the settlement will be tax deductible. On the day that the Citigroup settlement was announced, investors drove its share price up by 3 percent because they were pleased that an agreement was reached and the bank's latest results exceeded expectations.
JPMorgan's $13 billion settlement was a little more than 55% of the $23 billion it had set aside for its litigation reserve fund for this matter. $7 billion of the settlement was tax deductible.
The second reason is that there were so many victims. Some of them will be compensated from the dollars that have been paid but millions have had homes foreclosed on and savings lost because of this and they will never see any restitution.
It is estimated that in the United States today there are about 750,000 people incarcerated and approximately 4 million arrested for "victimless crimes". To date, no one from any of these big banks has been arrested or charged for these financial shenanigans which have been so "victim-full". This seems like a miscarriage of justice.
This brings us to the final reason and that is the need for consequences for misdeeds in order to modify future behavior. A concern about personal consequences can serve as a deterrent.
If bank executives think they can buy their way out - exercise their "get out of jail free" cards, they could fall back into the same miscreant pattern and practices that brought us the great recession or invent even more diabolical and destructive ones. If on the other hand, they have the potential of being handed another card - one that reads "Go directly to jail. Do not pass go. Do not collect $200., they may think more than twice about doing something nefarious.
We recognize that jails are not known as good places for rehabilitation and reform. We are not talking about that here, however. What we are talking about is a matter of fairness and equitable treatment.
Civil settlements get us part way to justice with these banks. Due process and consideration of the criminality of individuals for their "egregious misconduct" gets us the rest of the way.
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