There’s no justice in the US government’s record Bank of America settlement
Surely anyone who hoped to see banks punished in the wake of the financial crisis should be ecstatic with the new settlement between Bank of America and the US Department of Justice? They’re not, though. The only person coming out on top in this settlement is the US government, which gets to pocket a big cheque and wave another bloody scalp, hard on the heels of a similar $7bn (£4.2bn) settlement with Citigroup in July, and a $13bn settlement with JP Morgan last year, over a claim that it misled investors in mortgage securities.
It certainly can’t be the scale of the settlement that fails to satisfy, since at about $17bn, it is eye-bulging: amounting to handing over Bank of America’s entire profits for the last three years. It is not just the biggest settlement yet in relation to the financial crisis, but the biggest ever corporate settlement with the federal government in US history.
Bank of America’s current chief executive Brian Moynihan has been working hard for almost five years to move the bank on and clean up its legal troubles. As such, he at least might be expected to consider it money well-spent to finally draw a line under this saga. But the lengthy negotiations that took place before agreement was reached hardly suggest this was the deal his bank was looking for either.
It’s easy to see why. The lion’s share of the cases in dispute weren’t committed by the bank at all, but by institutions it saved in the throes of the crisis: Merrill Lynch and Countrywide. Between 2004 and 2008, the three issued $965bn in mortgage-backed securities to private investors. Of that total, about $700bn was issued by Countrywide.
And at the time, government agencies encouraged Bank of America’s rescue act. In other words, this is largely a punishment for acts committed by other companies – that the bank was then leant on to acquire as a public service. It’s easy to understand its reluctance to pay top dollar.
But those who you might expect to cheer on the bank-bashing aren’t happy either. For one thing, this is a deal that favours government coffers. The $17bn is expected to consist of $9bn in cash and the rest in relief to distressed homeowners. The bank had wanted more than half of its payment to go to help this latter group directly.
Worse, to many, this settlement does not feel like justice. A backroom deal leaves no room for the public presentation of evidence or for wrongdoing to be proved in open court under due process. And, as the banks might ruefully add, the price of a quiet life is the loss of the chance to make a robust defence in public as well.
Instead, we have a bargain that looks far too much like a shakedown. The great tragedy of the crisis was the imposition of bailouts that effectively rewarded failure. Now the post-crisis punishments are failing to restore a sense of fairness on either side.