Big Banks: Big Fines: Business As Usual

Last week, the Department of Justice announced that five major global banks had agreed to cop parent-level guilty pleas that rendered them all official corporate felons. The banks will pay more than $2.5 billion of criminal fines on top of a slew of past fines, plus regulatory and other fines of $3.1 billion, on top of a slew of past fines. It doesn't take a genius to see the pattern. Crime. Wrist-slap. Rinse. Repeat.

Here’s the thing. These kinds of penalties cause no financial damage; the profit was booked and releveraged long ago. The costs of the fines were set-aside in tax-deductible reserves awaiting this moment. Pleading guilty to one-count of felony level price rigging yet being allowed to maintain their status also alters nothing. These foreign currency exchange (FX) market manipulators – or “The Cartel” as they call themselves - Citicorp, JPMorgan Chase,  Barclays, The Royal Bank of Scotland, and UBS AG (who also received a $203 million fine for breaching its prior LIBOR manipulation settlement) will feel this punishment like an elephant feels a gnat, maybe even less.

As is customary after these sorts of fines are announced, the Department of Justice, aided in its investigations by a host of international regulatory and judicial bodies that are financed with taxpayer dollars and missed what was going on for years, waxed triumphant.

“Today’s historic resolutions,” remarked newly appointed Attorney General, Loretta Lynch, “serve as a stark reminder that this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers.”

She claimed that the penalties levied against these banks were commensurate with the “long-running and egregious nature of their anticompetitive conduct.” She further added that they “should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.”

But they won’t deter anything. Of that particular pack and this particular time, UBS was the only firm that agreed to pay extra for repeat crimes, but the rest of the crew are all repeat offenders in their own right who have had no restrictions placed on their might or market share as a result.

On the urban streets, recidivists get thrown behind bars. In the hallowed corridors of banking, financial goliaths only have to say they’re sorry, pay a fine, and promise not to do it again. In the real world, being tarred a felon makes it harder to get a job, a mortgage, and a personal loan. In the financial realm, it means business as usual following mildly unpleasant press releases and tiny fines from proud arbiters of justice and vigilance.

Since the 2008 financial crisis, some $140 billion worth of settlements against major banks have been announced by the Department of Justice, international regulators and class action legal teams. A normal person could be forgiven for losing focus of the details. It gets fuzzy after mortgage fraud and money laundering. By the time we reach manipulating LIBOR (London-Interbank-Offering-Rate) or rigging FX rates, it can seem mind numbing. Consider this, anything that costs you money has been influenced or manipulated by the big banks. Why? Because of their size and ability to use it against, or on the gray line of the law, to their advantage.

For not one, but for more than five years, from December 2007 and January 2013, euro-dollar traders at Citicorp, JPMorgan, Barclays and RBS – “The Cartel” – used an exclusive electronic chat room to coordinate their trading of U.S. dollars and euros so as to manipulate the benchmark rates set at the 1:15 PM European Central Bank and 4:00 PM World Markets/Reuters fixing times in order to maximize their profits. 

They would withhold buying or selling euros or dollars if doing so would hurt open positions held by their co-conspirators. In the global game of profit extraction, these sometimes-competitors protected each other in a manner similar to two mafia families locking arms (or firing shots)  to keep a third away from encroaching on their territory.

Each bank will pay a fine “proportional to its involvement in the conspiracy.” Citicorp, who spent the longest time rigging the FX markets, from as early as December 2007 until at least January 2013, will pay a $925 million fine. Barclays will pay a $650 million fine and a $60 million criminal penalty for violating its 2012 non-prosecution agreement regarding LIBOR rigging. The firms will fire 8 people, though not the CEO.

JPMorgan Chase, involved from at least as early as July 2010 until January 2013, agreed to pay a $550 million fine; and RBS, involved from at least as early as December 2007 until at least April 2010, agreed to pay a $395 million fine. 

Citicorp, Barclays, JPMorgan Chase, RBS and UBS have each agreed to a three-year period of corporate probation and to cease all criminal activity. (I’ll take the under on  when the next set of criminal activity related settlements hits them. )

Adding in the $4.3 billion from their November, 2014 related settlements with US and European regulatory agencies, last week’s FX “resolutions” bring the total fines and penalties paid by these five banks –  just for their FX conduct – to about $10 billion. 

Citicorp settled for the largest criminal fine of $925 million, on top of a $342 million Fed penalty. The other banks were fined relative to the fractional portion of the crime time frame.  No jail sentences were imposed – not even a day of house arrest or ankle monitors.

Size does matter. Sort of. According to the agreements,  “the statutory maximum penalty which may be imposed upon conviction for a violation of Section One of the Sherman Antitrust Act is a fine in an amount equal to the greatest of: $100 million, twice the gross pecuniary gain the conspirators derived from the crime or twice the gross pecuniary loss caused to the victims of the crime by the conspirators.”

But since there’s no way the DOJ totaled all the fractional losses non-Cartel members felt over the five years (which would likely include your by the way), it means that they believe the five banks at most collectively made $5 billion over five years, or $1 billion each (give or take) or $200 million (give or take) each from FX manipulation per year. I’m calling hogwash on that; $200 million per year rigging FX rates would have been such a pocket change game that the Cartel would have lost interest in it quickly.

JPM Chase’s press release didn’t mention the word ‘felony’ instead opting for the more demure term ‘violation.’ In keeping with his normal reaction to the financial crimes of his company, JPM Chase Chairman and CEO Jamie Dimon used the “bad-apple defense.” Calling this latest revelation of felonious activity a “disappointment,” he stated, “The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us, and have significant ramifications for the entire firm. That’s why we’ve redoubled our efforts to fortify our controls and enhance our historically strong culture.”

That’s not quite true. Not only was the supervisor of Foreign Exchange at JPMorgan not fired, but as Wall Street on Parade reported last week, that “individual, Troy Rohrbaugh, who has been head of Foreign Exchange at JPMorgan since 2005, is now serving in the dual role as Chair of the Foreign Exchange Committee at the New York Fed, helping his regulator establish best practices in foreign exchange trading.”

Stock values of the Cartel-Five banks only mildly underperformed the overall market on the day of the announcement, since their chieftains made it clear that money had already been set in reserve for these fines. They rebounded the next day.  In other news, last Tuesday, Jamie Dimon’s annual pay package of $20 million passed a shareholder vote.  

As for Citicorp, the firm’s settlement with the Federal Reserve included the entry of a cease and desist order (for criminal activity) and a civil penalty of $342 million. Citi also reached a separate settlement  in a related private class action suit for $394 million.

Michael Corbat, CEO of Citigroup, said, “The behavior that resulted in the settlements .. is an embarrassment to our firm, and stands in stark contrast to Citi’s values.” He added, “We will learn from this experience and continue building upon the changes that we have already made to our systems, controls, and monitoring processes.”

Investigations of other crimes continue. The EU, for instance, is re-evaluating its [4-year on hold] antitrust probe into whether 13 of the world’s largest banks conspired to shut exchanges out of the credit-default swaps (CDS) market in the years surrounding the financial crisis. Goldman Sachs. Bank of America, Deutsche Bank AG, JPMorgan Chase, Citigroup and HSBC Holdings are among the multiple-offender banks accused of colluding in this game from 2006 to 2009.

The upshot is this. These fines don’t matter. Felony pleas are a nice touch, but none of these punishments impose solid structural change, nor is any being suggested. Putting the fines in perspective, Citicorp's criminal fine of $925 million is equal to 1/20th of 1 percent of its assets. For JPM Chase, the fine of $550 million is equivalent to about 1/50^th of 1 percent of its assets.  Why would that deter anything?

Words of contrition from bank CEOs have repeatedly followed the unearthing of fresh crimes or settlements for correlated criminal or quasi-criminal behavior. Words of triumph from justice officials or regulators have proceeded more manipulations and discoveries. Aside from our tacit support for these banks by keeping our money with them or using them for more humble services, we citizens pay for the people-hours of public officials in a myriad of ways including funding the bodies that are supposed to keep us financially safe from bank shenanigans.

How many more crimes do these banks get to commit before these judicial and regulatory bodies, and the rest of Washington wakes up and breaks them up? Bigger banks, bigger crimes. Smaller banks, smaller crimes. At least, a size reduction would be a step in the right direction.

The People vs. Federal Bank Settlements and Liquidity Rules

Last week, in an interview with Bloomberg News, former Countrywide CEO, Angelo Mozilo gave the nation the middle finger. He expressed zero remorse or culpability for his very personal (and personally lucrative) role in the subprime crisis that catalyzed a global economic recession. Apparently baffled by a potential lawsuit that could be levied by the Los Angeles US Attorney’s Office, he said, ““Countrywide didn’t change. I didn’t change. The world changed.” After blaming the world, he ended his segment by stating, “We didn’t do anything wrong.”

To him, the culprit was the real estate collapse itself.  The same excuse was used by Big Six bank CEOs before multiple Congressional hearings and business news hosts. “OMG, how could we have known prices could GO DOWN?” By placing the blame on the ‘market’, they spun their actions as reactive or ancillary to its apparently random whims, as opposed to proactive on practices leading to crisis events.

The more temporal distance from those events and airtime given to the bankers that inflated the market before crashing it, and Treasury Secretaries that did ‘what they had to do’ in an emergency, the more the Mozillian narrative is cemented in the main annals of history and the plight of the public is rendered a footnote.  Yet, it was not just the loans themselves, but more so, the immense and profitable re-packaging and global re-distribution of those loans in a pyramid of toxic assets wrapped with credit derivatives that blew up in the face of the nation and the world, The economic implosion that followed ignited by the weight of such epic fraud and CEO directed salesmanship, impacted initial borrowers with conditions beyond their control, on top of initial fraud and voracious pushing of those loans to begin with. Thus, banks concocted $14 trillion worth of assets using $1.5 trillion of high-interest loans, compounding and adding to each bit of fraud, instability and risk along the way.

Forbes ranked Mozillo one of the top ten highest paid CEOs in 2006. By 2009, the SEC charged him with fraud for lying about the quality of the loans he sold to Bank of America and insider trading for pocketing $140 million from selling his stock when he knew those loans, and his company, were crumbling. He wound up paying a $22.5 million fine to settle the charge of misleading investors and $45 million for the insider trading charge – leaving him a cool $72.5 million.

But that’s in the past, and his recent denials merely reinforced the stances of Big Six bank leaders such as JPM Chase’s Jamie Dimon and Goldman Sachs' Lloyd Blankfein, who expressed a modicum of media-trained contrition only after their settlements were done and dusted.

Much of the mainstream media finally got it right though, characterizing the Bank of America’s “record” $16.65 billion settlement for the bogus deal it is. Only $7 billion of the settlement is even remotely slated for borrowers, and even that is absent any binding rules on aid reaching them. The reality is, the borrowers that should get the most assistance - not because they embellished applications as the blame-the-victim folks say - but because they were duped by bankers and then crushed by an economy turned on its head due to fraudulent bank practices that were federally subsidized - are the ones that lost their homes years ago. Absent a settlement that makes banks buy them new homes, they remain screwed.

The overall tenor of the settlements is worse than their feeble size and structure. Department of Justice Attorney General, Eric Holder’s John Wayne we-got-em attitude belies the most broken of systems – one that leaves fraud, embezzlement and grand larceny unpunished, and stokes rampant wealth inequality in the process.

So far, the Big Six banks - JPM Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs (and nominally Morgan Stanley) - and their expensive (and largely tax deductible) legal teams have successfully negotiated about $106 billion in mortgage (fraud) related settlements with federal or state governments. Of this, given the language of their settlements (not the benevolent press release versions), at the most $32 billion may get to some borrowers one day. Even that depends on banks upholding promises to do things like reduce existing principal balances that would only help people who haven’t already lost their homes. Banks might also provide minimal funds for people with the stomach for endless phone calls with "customer-service" representatives to access them. These, however, have proven relatively fruitless over the past six years since Obama unveiled his HAMP program - which was supposed to require from banks what these settlements do.

In addition, the Big Six settlements are negligible compared to the damage their practices (and the practices of the investment banks they bought at the onset of the crisis rendering them bigger) considering that since 2006, there have been foreclosure actions brought against nearly 15 million homes. With an average value of about $191,000 per home, the total value represented by those foreclosure actions is approximately $2.8 trillion - a far cry from $106 billion.

Let this sink in. Our government and bankers settled on $32 billion in maybe-aid to borrowers relative to $2.8 trillion of foreclosed properties many of which are being scooped up by hedge and private equity funds financed by the same big banks. Not only that. These banks have been able to access money at close to 0 percent interest courtesy of the Federal Reserve for nearly six years. Yet, rather than reducing mortgage principals with that extra cheap money, they stockpiled a record volume of $2.5 trillion in excess reserves at the Federal Reserve for which they are reaping 0.25% interest – higher interest than they give their mere mortal customers.  

The Big Three banks bagged some major headlines for their settlement figures. But the devil is in the details of who gets the money. Bank of America’s largest $16.65 billion settlement is part of $61.6 billion in government-negotiated mortgage-related penalties. Of these, only $15.6 billion is vaguely slated for borrowers.  

For Citigroup, the total value of federally settled penalties of $13.35 billion includes just $4.29 billion for borrowers. For JPM Chase, total federally-settled penalties tally $21. 76 billion. Of this, $8.2 billion might wind up with borrowers one day.

Of the $106 billion in Big Six bank settlements, just $1.68 billion are with the SEC whose job it is to protect the public from securities violations (which over-valued toxic assets comprised of fraudulent loans are in my book, but I don’t run the SEC.) 

Compare that with a litany of items of power and wealth inequality in motion. First, at the height of the government-sponsored bailout and subsidization period of late 2008 through early 2009, more than $23 trillion of loan facilities, subsidies and other aid were offered to mostly the Big Six Banks. Second, Wall Street bonuses for the time from the settlements and through their negotiation periods (2006-2013) were $221.6 billion. 

Third, the Fed has compiled a $4.4 trillion book of Treasury and mortgage securities to keep rates down and securities prices up, providing banks a metric with which to mark similar mortgage securities on their books at artificially high prices, without having to alter mortgage principals for borrowers, as part of the bargain. The Fed claims this strategy is to create jobs, not to reinvigorate banks and bank bonuses.

Finally, the total assets of the Big Six banks are valued at $9.6 trillion. On September 4^th, US regulators, including the Federal Reserve, presented their idea for protecting us from future big bank risk– something called a new liquidity rule. Under this rule, each big bank would need to stash away $100 billion in cash or 'cash-like' assets in case of emergencies, a big bank piggy bank if you will.  But, all the new rule does is require big banks to hold a whopping 1% more cash then they did before the crisis.

Banks lobbied regulators the same way they settled with the justice department, ultimately getting off the hook for potentially having to hold $200 billion instead of $100 billion, less they not be able to speculate with the extra $100 billon (they argued that extra $100 billion was for extending credit to customers).  To put this new ‘safety’ rule into perspective, consider that in 2007, before the financial crisis, JPM Chase held $40 billion in cash vs. $1.5 trillion of assets, or 2.7% of them. Under the new rule, it would need to keep $100 billion in cash vs. the $2.4 trillion assets it now holds courtesy of the government triarch of former Treasury Secretary Hank Paulson, former NY Federal Reserve President-cum-Treasury Secretary Tim Geithner, and former Federal Reserve Chairman, Ben Bernanke, or 4%. This excercise is not about fashioning a broad financial safety net - it's just another regulatory mirage presented as reform by the powers that be.

Absent convictions, or at least a public trial where at least arguments over what consituties felony fraud and exortion can be exposed, these settlements reflect just 1% of the Big Six bank assets, all of which grew since the crisis began, on the back of government and Fed policy and support. Rather than being a determinant of justice, they represent a reinforcement of the power oligarchy that aligns government and banking elites on one side of the economy and the broader population on the other. None of this bodes well for the next crisis.