Pocket-Change SEC Fines: Barely a Bark and No Bite

There's a reason yesterday's announcement that JPM Chase would 'settle' for a fine of $156.3 million, while neither admitting nor denying any wrong-doing, thereby forking over the whopping equivalent of a normal person's weekly grocery budget, pisses people off. Because it's a marginal fleabite on the teflon hand of the nation's second largest bank in terms of punitive pain, and absolutely meaningless in altering the grand scheme of toxic securities creation or  complex financial institution business as usual. 

The trivial settlement appears even tinier in comparison to the financial aid JPM Chase received in the wake of its financial crisis. Despite all of CEO Jamie Dimon's disingenuous, though fervently delivered, remarks to the contrary (he didn't need a bailout, he took it for the 'team' to ensure no bank would be singled out to sport a scarlet 'B' of bailout shame), JPM Chase at one point, during the height of the bank's federal subsidization program, floated on nearly $100 BILLION dollars worth of - exceptional assistance. That figure included: $25 billion from the TARP fund, which has since been repaid, $40.5 billion dollars of new debt backed by the FDIC's Temporary Liquidity Guarantee Program (TLGP), which has since been retired, about $6 billion through various aspects of the TARP HAMP program which aided a fraction of underwater borrowers, and $28.8 billion behind its Fed-backed, Treasury-pushed acquisition of Bear Stearns, which is still in place. That's aside from its government aided acquisition of Washington Mutual.

There are those that believe that the bailout program (which they continue to equate to just the $700 billion TARP program) was a success (like the Fed, Treasury Department, or any Administration).

Yet, subsidizing Wall Street's most powerful creatures, altered nothing for the banks that survived, while promulgating ongoing economic pain for the general population caught in the wake of a $14 trillion dollar asset creation machine, which became a globally leveraged $140 trillion still-decaying mess, spurred by rapacious speculation, that sat on just $1.4 trillion of sub-prime loans and various other properties. 

Banks want us to believe that widespread economic pain has nothing to do with them, that they were innocent participants. Maybe they made a few mistakes - for which they're paying SEC directed fines, but hey, we all do.

Meanwhile, the budget bantering that drones on in Washington keeps missing the fact that part of the bank subsidization process remains on the Fed's books. This includes $1.6 trillion dollars in EXCESS bank reserves - i.e. reserves for which the Fed is paying banks 0.25% to NOT lend, about $900 billion worth of mortgage-backed securities, and $1.5 trillion worth of Treasuries, partly from the QE2 program. That's an awful lot of captive non-stimulus. It sure isn't helping drive job creation or small business expansion sitting there.

Of course, this latest SEC settlement is not the first non-punishment for a bank's role in producing or promoting a leveraged mountain of faulty assets. The hush money action is part of a now-two-year SEC program to address, in the commission's own words, 'misconduct that led to or arose from the financial crisis.'

Leaving aside, the tepid characterization 'misconduct' instead of say 'racketeering', these fines don't, and won't, change the banking system. And nowhere does this fining regulatory body suggest a way to do so. It would be refreshing for the SEC, founded in conjunction with the Glass-Steagall Act that separated banks into institutions that dealt with the public's deposit and financing needs from those that created and traded speculative securities for private profit purposes, to suggest a modern equivalent of that act. It might help the commission do its job of protecting the public before unnecessary devastation, not years afterwards, or at the very least, untangle the web of layered borrowing and debt manufacturing at the core of these complex giants.

But, that's not going to happen. Not as long as small fines, absent any form of attached probation, stringent monitoring, or cease-and-desist requirements, can slowly make the issue go away. Seriously, it takes longer to argue a traffic ticket than it took Goldman Sachs to 'agree' to a $550 million settlement on July 15, 2010, after the SEC charged the firm with defrauding investors only three months earlier. People caught with minor amounts of crack or pot undergo stricter plea processes, probationary measures and detainments. 

To date, the SEC has charged four firms with CDO related fraud, including Wachovia, Goldman Sachs, and JPM Chase, who settled for $11 million, $550 million and $156 million respectively. A case against ICP Asset management remains open. 

The commission has charged five firms with making misleading disclosures to investors about mortgage-related risks, including American Home Mortgage, whose former CEO settled for a paltry $2.45 million fine and a 5-year officer and director bar, Citigroup, that settled for a $75 million penalty, Bank of America's Countrywide, whose former CEO, Angelo Mozilo agreed to a $22.5 million penalty and a permanent officer and director bar (a fraction of his pre-crisis take), and New Century, whose executives paid $1.5 million and agreed to a five-year bar. There is an ongoing case against IndyMac Bancorp.

In addition, the SEC charged six firms with concealing the extent of risky mortgage-related assets in mutual and other similar funds. Those included Charles Schwab that settled for a $118 million fine, Evergreen that settled for $40 million to mostly repay investors, TD Ameritrade that settled for $10 million, and State Street that settled to repay investors $300 million.

Separately, Bank of America agreed to a $150 million settlement for misleading its investors about bonuses paid to Merrill Lynch and not disclosing Merrill Lynch's mounting losses. This didn't stop the Federal Reserve and Treasury Department from remaining steadfastly behind the Bank of America/Merrill Lynch make-a-too-big-to-fail-bank-bigger merger, upon which the settlement was based.

In total, the SEC, mildly policing the vast financial system that pushed a criminal musical chairs game of last-one-holding-a-toxic-asset-or-underwater-mortgage-loses, charged 66 entities and individuals with 'misconduct', imposed 19 officer or director bars, and levied $1.5 billion of penalties, disgorgement, and other monetary relief fines. Put that in perspective, say, with the $28 billion in bonuses that JPM scooped up for just 2010, or the $424 billion in total bonuses the top six banks bagged between the crisis book-end years of 2007-2009, or the $128 billion of bonuses Wall Street got last year. Now, consider that not only is the penalty amount a pittance, but the impact of these fines, is even smaller. And, that's the bigger problem with fines, particularly tiny ones. They offer this illusion of a fix that leaves us worse off from a stability perspective than we were before.

Ten Reasons the Goldman Settlement Hurts Us

I did a segment about this on Dylan Ratigan's show earlier today: 

1) The fine of $550 million is a drop in the bucket for Goldman. It's about 4% of the $12.9 billion it received from the Federal Government through AIG. (which is only part of the largesse the firm enjoyed courtesy of our government (see my bailout reports.)) It's equivalent to less than $1500 of an average person's salary.

2) Contrary to popular media stories, $550 million is NOT the largest settlement for a Wall Street securities firm we are expected to believe it is, the $650 million settlement with Drexel Burnham Lambert in 1988 was (not to mention the $600 million settlement with Michael Milken bringing that tally to $1.2 billion.) 

3) The settlement went along party lines. It was the two Republicans who voted against settling - probably because it involved money, but it's nicer to think it's because it involved no confirming or denying any wrongdoing, and the shutting down of future potential investigations and charges. The Democrats voted for it because they thought it was actually meaningful, or wanting to convey that it was. Not sure which is worse.

4) Mary Shapiro, the Obama SEC head appointee who agreed to a mere $33 million dollar fine on Bank of America's behavior when Ben Bernanke and Hank Paulson pushed its merger with Merill, that was subsequently overturned in courts because it was ridiculous, cast the deciding vote. Way to go, Mary.

5) It took just half an hour to gain approval - that's a fraction of the time it would take to reach a settlement for a marijuana case. All that shows is how absolutely, disgustingly biased against people our justice system is. 

6) The settlement closes the possibility of further investigations into any of Goldman's other deals. It closes the possibility of further investigations into similar deals at other firms that participated in the toxic asset shuffle.

7) It validates Tim Geithner's saving of AIG with its backdoor benefit to Goldman and others. (Because of the above, the CDO business remains impervious to investigation or change. If Goldman had been found to have made more than  'a mistake', we might have circled back to the relationship between AIG and Goldman, or AIG and other firms, regarding CDOs, which might have made Tefflon Timmy look bad. 

8) It validates the closing of the investigation of AIG by the Department of Justice and the SEC two months ago, showing that not only do we have weak regulators, we have a misguided justice department.

9) The timing coming so close after the announcement of the Senate's approval of the so-called sweeping financial reform package was meant by the SEC (and Obama administration) to show its power and effectiveness, but instead, it showed its complete capitulation to Wall Street. Along with the toothless reform package, the settlement solidifies the status quo on Wall Street.

10) It confirms the fact that our regulators have no interest in examining the types of deals that were central to the financial markets and credit meltdown, anymore.