The billion-dollar fines that financial institutions have been forced to pay for bringing down the global economy sound impressive, but are they really? Not only are most of the banks sitting on huge piles of money, but considering the damage their actions caused in the wake of the 2008 financial crisis, the punishment did not fit the crime.
Most important, there does not appear to be a personal deterrent in place for the executives that plunged the entire world into this mess.
In light of the lack of accountability, it’s certainly not surprising that bankers take reckless actions because they know that, at worst, a golden parachute is waiting for them instead of the inside of a prison cell.
That also seems unlikely to change because of the close relationship between those in the halls of power in the nation’s capital and the financial institutions in New York.
“The relationship between Washington and Wall Street isn’t really a revolving door,” said former Labor Secretary Robert Reich in commenting on the book excerpted below. “It’s a merry-go-round. And, as Prins shows, the merriest of all are the bankers and financiers that get rich off the relationship.
Excerpt from All The Presidents’ Bankers:The Hidden Alliances That Drive American Power by Nomi Prins (Originally published in hardcover by Nation Books, April, 2014 ) Chapter 19. The 2000s: Multiple Crises, the New Big Six, and Global Catastrophe
The Justice Department Goes Soft on Bankers
Many congressional hearings and investigations have probed the bankers’ practices since the crisis that began in 2007. Similar to the Pujo hearings after the Panic of 1907, though, they have resulted in nothing material against the bankers with the strongest political alliances. And unlike the impact of the 1932–1933 Pecora Commission hearings, no substantive regulatory act has passed to significantly alter their behavior.
Though banks would end up paying various fines and legal settlements, that amounted to fractions of pennies on the dollar relative to their immense asset bases. Their structure and influence remained unaltered.
As of September 1, 2013, the SEC reported it had levied just $1.53 billion in fines and $1.2 billion in penalties, disgorgement, and other money relief against the big banks for their multitrillion-dollar global Ponzi scheme—or as the SEC put it, “addressing misconduct that led to or arose from the financial crisis.”(160) Goldman paid a $550 million fine from the SEC for a similar allegation.
The firm admitted no guilt for the related activities. Bank of America paid a $150 million fine without admitting any guilt for misleading shareholders regarding its payment of Merrill Lynch’s bonuses when it took over the firm. JPMorgan Chase eventually settled the London Whale probe with a $1.02 billion fine, greater than the fines it paid the government for all of its housing-related infractions. Though the firm admitted that it had violated banking rules by not properly monitoring trading operations, that kind of admission was akin to copping a misdemeanor plea while facing a major felony.
On August 1, 2013, a federal judge approved a $590 million settlement by Citigroup in a shareholder lawsuit accusing the bank of hiding billions of dollars of toxic mortgage assets. (161) On that same day, a jury found former Goldman Sachs banker Fabrice Tourre liable for his role in the Abacus deal, which lost some investors $1 billion. The ruling was dubbed a major victory for the SEC. “We are obviously gratified by the jury’s verdict and appreciate their hard work,” lead SEC lawyer Matthew Martens said.(162)
The Justice Department chose not to criminally prosecute the chairmen from Goldman or JPMorgan Chase (both of whom ranked in the top twenty for Obama’s career campaign contributors) or from anywhere else for creating faulty CDOs, trading against them, dumping them on less knowledgeable investors, or otherwise speculating with capital supposedly siphoned off for more productive and less risky purposes.
Similarly, the Justice Department punted on prosecuting Jon Corzine, the former governor of New Jersey and a top-tier bundler for Obama. Steering his firm MF Global into an abyss, Corzine had bet more than $6 billion on European sovereign debt.(163) The $1 billion MF Global “mistake,” the multibillion-dollar losses on bets made by Chase, the CDOs chosen by the firm’s biggest hedge fund clients that had been set up to fail—these were apparently just minor events in the scheme of making money and maintaining alliances.
On October 31, 2011, MF Global filed Chapter 11, with $41 billion in assets and $39.7 billion in debt, the eighth largest bankruptcy in US history. Four days before the collapse, Corzine sent an email to an employee “to strategize how they could use customer segregated funds [and get JPMorgan Chase] to clear MF Global’s trades more quickly.” He avoided criminal fraud charges.
The general response of Obama and his cabinet toward Wall Street criminality and the sheer unsavoriness of its leaders showed the degree to which nothing had changed and the lack of commitment to reform. If nothing changes fundamentally in the banking landscape, more and larger crises are a given.
The most powerful banks are bigger, more interconnected, and more reliant on cheap money and federal largesse than ever. Their leaders are unrepentant and unaccountable. Their political alliances require nothing of them anymore except some fines that can be easily re-earned.
By 2013, the major global banks were sitting on nearly $3.3 trillion of excess reserves (about $2 trillion for the US banks at the Fed and the rest at the European Central Bank), refusing to share their government aid with the citizens of the world.
By October 2013, the government was careening toward a debt cap of $16.49 trillion, and the weakness of the US political system relative to the financial one was demonstrated by a government shutdown over budget and ego squabbles.
The Fed’s balance sheet had ballooned to a historic record of just over $3.7 trillion, comprised in part by $2.1 trillion of Treasuries, or nearly $2 trillion in excess bank reserves.(164) These government debt securities were issued by the US Treasury, purchased by the banks, and then reverted as excess (nonrequired) reserves to the Fed—in other words, a nonproductive circle of extra national debt issued for no real reason.
In addition, the Fed books contained $1.34 trillion of mortgage-backed securities (following the establishment of an $85 billion per month mortgage-backed and Treasury securities purchase program, totaling more than $1 trillion per year).(165)
The size of the Fed’s books had increased by 25 percent since July 2011 and 50 percent since July 2009, and it stood at ten times the amount it had been in July 2008. All of this debt was held as means to prop up bond prices so the bankers could maintain higher values on their books of associated securities, and to keep rates low so that money remained cheap, under the guise of aiding the broad economy.
In numerous speeches, Bernanke condoned his zero-interest rate policy and “quantitative easing” bond-buying policies, which kept the rates at which banks borrowed money at zero. The bankers were certainly happy.
They could use their money on other speculative ventures, and their remaining faulty mortgage-backed securities would be bought by the Fed.(166) Their 2012 bonuses rose $20 billion, up 8 percent from 2011.(167)
The cycle of banker–White House alliances persisted. The Senate confirmed Obama’s choice of Jack Lew to succeed Tim Geithner as Treasury secretary on February 27, 2013.(168) Lew was no stranger to big bankers either. In his prior role as Obama’s director of the Office of Management and Budget, he met often with Wall Street’s elite.
Before that, he had served in the Clinton White House with Rubin, and with Summers during the Glass-Steagall repeal days.(169)
Like his mentor, Rubin, Lew had worked at Citigroup, where he served as chief operating officer of the alternative investments unit.(170) He got paid $940,000 in early 2009, while Citigroup was inhaling bailout funds. He had served in the division that the SEC charged with hiding $39 billion of subprime debts in off-balance-sheet structured investment vehicles. (171) In Washington, he just might help Citigroup regain some of its old glory.
By July 2014, four years after the Federal Crisis Inquiry Commission first convened (it went on to hold nineteen days of public hearings and review millions of pages of bank documents on the causes of the financial crisis), the total amount of SEC fines levied along with various, mostly mortgage-related, legal settlements for the six major US banks reached about $106 billion, or about 0.8 percent of their assets.(172) Of that, only the $1 billion levied for JPMorgan Chase’s London Whale trade involved admission of a crime.
The total figure was equivalent to one month of the Fed’s mortgage and Treasury securities purchase program, which entailed buying many similar potentially questionable securities from the banks, thereupon aiding the funding of their “Punishments.”
The media reported the multibillion-dollar bank settlements as if they had far more meaning to the population than they actually did, especially considering only approximately $20 billion of them involved cash fines.
Relative to the Big Six banks’ assets of approximately $9.6 trillion and their profits over the years preceding the financial crisis, the figure was a drop in the bucket, and revealed a “let them shoot first, get questioned later” attitude on the part of the federal justice and regulatory system.
The Obama administration remained silent on what constituted, if even unofficially, mass organized crime, or at least gross incompetence and fraud (though not admitted) on the part of the banking system and its leaders.
Moreover, even though most of these repercussions were related to the banks’ ability to issue, source, repackage, trade, and distribute complex mortgage and related securities from under one roof, there came no bold statements from the White House on resurrecting a Glass-Steagall act that would once again prohibit these joint activities within one bank.
Neither the details nor the occurrence of the settlements and ongoing investigations served to shake the support, and thus the unofficial endorsement, of the Oval Office for the bankers’ power in the form of their overall structure or their Federal Reserve–backed status.
Though WorldCom CEO Bernie Ebbers and Enron CFO Andrew Fastow went to jail for their corporate misdeeds, no major bank CEO was found to have done anything criminally wrong while presiding over practices that caused great global harm, though some of their more junior staff took the heat. That too had historical precedent: bankers with tighter ties to the president or Treasury secretary tend to get passes. They control the money flow.
If the “money trusts” back in the 1910s were powerful, after a century of Fed backing and tightening political-financial alliances, the millennial money masters of today are even more so.
The moral hazard of supporting their movements has become far greater. One major difference between now and then is that the control of finances by private bankers is far broader, the complexity of financial instruments greater, and the danger of a total systemic collapse more likely.
In a November 2009 interview with London’s Sunday Times, Lloyd Blankfein, was asked about the size of his firm’s staff bonuses. He claimed that he was just a banker doing “God’s work.”
As for the economic disparities that “work” engendered, he said, “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.” After all, he explained, Goldman Sachs is helping “companies to grow by helping them to raise capital. We have a social purpose.”(173)
His words, which he noted as tongue-in-cheek later, echoed so false against the backdrop of a deflated public economy that all manners of media slammed them.
But there was a kind of truth to what he said.
There have been times when the biggest bankers shattered public trust and times when the public believed that bankers’ interests somewhat aligned with their own. In those periods, bankers took public service roles that weren’t just related to the economy, and they didn’t flaunt their wealth. The Great Depression provoked a climate of social responsibility. Related bank regulation lasted for decades. During World War II, many Americans even equated bankers with patriotism.
Today, no such attitude prevails. Never before have the government and the Federal Reserve collaborated so extensively by propping up the banking system to the detriment of the population. Never has the world been so quick to push austerity on countries whose only crime was standing in the way of banker speculation. Never have bankers thought this was copacetic. Never have their political alliances been so widespread yet so impersonal. Never have their rewards been so high….
160. Revised Statistics, “SEC Enforcement Actions Addressing Misconduct That Led to or Arose from the Financial Crisis,” as of September 1, 2013, at www.sec.gov/spotlight/enf-actions-fc.shtml.
161. Nate Raymond and Bernard Vaughan, “Judge Approves Citigroup $590 Million Settlement,” Reuters, August 1, 2013, at www.reuters.com/article/2013/08/01/us-citigroup-settlement-idUSBRE9700T420130801.
162. Nick Summers, “Ex-Goldman Banker Found Liable in $1 Billion Fraud Case,” Bloomberg Businessweek, August 1, 2013.
163. Jonah Goldberg, “Obama’s Tainted Bundler,” Los Angeles Times, April 24, 2012.
164. Federal Reserve Board, “Factor Affecting Reserve Balances,” H.4.1. Release, October 10, 2013, at http://www.federalreserve.gov/releases/h41/Current/.
165. Federal Reserve Board, “Statement Regarding Transactions in Agency Mortgage-Backed Securities and Treasury Securities,” press release, September, 13, 2012, at www.newyorkfed.org/markets/opolicy/operating_policy_120913.html.
166. Pedro da Costa and Alister Bull, “Bernanke Says Fed Stimulus Benefits Clear,Downplays Risks,” Reuters, February 26, 2013.
167. Office of the State Comptroller, “Wall Street Bonuses Rose in 2012,” February 26, 2013.
168. The White House, “Statement from the President on the Confirmation of Jack Lew as Secretary of Treasury,” press release, February 27, 2013.
169. The White House, “Former Chief of Staff Jack Lew,” at www.whitehouse.gov/administration/staff/jack-lew.
170. Siddhartha Mahanta, “Flashback: Lew’s Time at Citi and Other Disappointments,” Mother Jones, January 9, 2012.
171. Pam Martens, “Democrats Disgrace Themselves with Jack Lew Confirmation for Treasury Secretary,” Wall Street on Parade, February 28, 2013.
172. National Mortgage Settlement Fact Sheet: Settlement, October 19, 2013, filed as a consent judgment in US District Court for the District of Columbia, at https://d9klfgi bkcquc.cloudfront.net/Mortgage_Servicing_Settlement_Fact_Sheet.pdf. See also “$25 Billion Mortgage Servicing Agreement Filed in Federal Court,” March 12, 2012, joint press release from the Department of Justice, the Department of Housing and Urban Housing Development, and forty-nine state attorneys general, at https://d9klfgibkcquc.cloudfront.net/Settlement-USDOJ-FILING-news-release.pdf. “SEC Enforcement Actions Addressing Misconduct That Led to or Arose from the Financial Crisis,” as of October 27, 2013, at www.sec.gov/spotlight/enf-actions-fc.shtml. “Independent Foreclosure Review to Provide $3.3 Billion in Payments, $5.2 Billion in Mortgage Assistance,” January7, 2013, joint press release from the governors of the Federal Reserve System and the Office of the Comptroller of the Currency, at www.federalreserve.gov/newsevents/press/bcreg/20130107a.htm.
173. Victoria Bryan, “Goldman Sachs Boss Says Banks Do ‘God’s Work,’ Reuters, November 8, 2009.
Related front page panorama photo credit: Adapted by WhoWhatWhy from Table setting for the State Dinner (Amanda Lucidon / White House Photo)