The Obama Department of Justice has been attacked from both sides for its post-financial crisis approach. Some, like Sen. Elizabeth Warren, believe it was insufficiently aggressive and followed a “too big to jail” policy. Others, including many in the banking industry, believe it acted wrongly in extorting huge penalties from banks for relatively venal sins.
Because of DOJ independence, my work in the White House gave me no window into specific cases. I have tended to sympathize with DOJ given the contradictory nature of the critics’ attacks and the complexity of the issues involved.
I was disturbed though to realize from reading Matt Levine’s blog that there was a large systematic overstatement of the burdens borne by banks as they settled mortgage-related claims. The typical press release began with the statement that Bank X agreed to a settlement of YY billion dollars in connection with its mortgage business. I, like I suspect many others, assumed this meant that Bank X shareholders were made poorer by YY billion dollars.
Not so. The settlements have two components. The first was a fine payable to the government. The second was labeled “consumer relief.” Since consumer relief was added to the fine, I naively assumed it represented payments by banks to consumers or additional relief from obligations for distressed borrowers. In fact, rather than these sums cited by the banks and DOJ, it seems that zero is a better estimate of the cost to banks of providing “consumer relief.”
Levine gives some examples. Goldman isn’t in the mortgage business so it provided consumer relief by buying mortgage pools at a big discount to par, reducing principal and then making a profit. Deutsche Bank satisfied the requirement by providing financing to hedge funds speculating in mortgage securities. I’d imagine other major banks with mortgage portfolios got consumer relief credit for carrying through on principal reductions that they would have found necessary wholly apart from the DOJ’s intervention. While there may have been some encouragement to principal reduction through these settlements, neither the cost to banks nor the incremental benefit to consumers is remotely comparable to the consumer relief figures advertised by both the DOJ and the banks.
Source: TheWashingtonPost
The post The disturbing way banks are still ducking punishment for driving the financial crisis appeared first on Compliancex.
March 29, 2017 at 11:06PM
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