The people versus Wall Street banks

Note: what is the point in a fine to a entity that creates money out of control ? It isn't just a masked bribe ?

The people versus Wall Street banks

 

Financial Times

 

Lawsuit raises concerns about out-of-court settlements

 

One of the reasons that banks remain unpopular with the American public nearly seven years after the crisis is the sense that they have not been held to account for the errors and malpractice that led to the meltdown.

 

The argument is that large banks have been allowed to walk away from their incompetence (to use a generous word) in loan origination and bundling. Regulators and prosecutors have stayed their hand out of an apparent fear that legal action might inadvertently bring down a systemically important institution. To the extent that banks have been punished, it has been in the form of fines that fall on battered shareholders and capital ratios rather than managers.

 

This perception of a “too big to jail” problem goes beyond popular imaginings. In testimony before the Senate last year, Eric Holder, the US attorney-general, admitted the size of banks had “an inhibiting impact” on prosecutions.

 

Now, a non-profit organisation that campaigns for financial reform has taken aim at one of the largest post-crisis settlements.

 

Better Markets is challenging the landmark out-of-court deal Mr Holder struck last November with JPMorgan Chase, in which the bank paid $13bn to settle claims that it had mis-sold mortgage-backed securities. Whether or not the case succeeds, it raises valid questions about the way the judicial authorities have dealt with the post-crisis reckoning.

 

The strength of Better Markets’ legal claim is debatable. It is based on the idea that the Department of Justice exceeded its powers in settling out of court, without seeking a judge’s blessing for the arrangement.

 

It should be said that there is nothing inherently abusive about such mechanisms. The DoJ routinely uses such out-of-court settlements to resolve cases. And indeed, there is an entirely reputable argument for doing so, when it allows prosecutors to reach an equitable deal without the costs, uncertainties and delays involved in legal action.

 

This, however, touches on the wider point raised by Better Markets – namely the difficulty in judging whether the settlement that has been reached is truly in the public interest.

 

What makes this moot in JPMorgan’s case is the uncomfortable trade-off between the vast fine and the absence of disclosure. While the magnitude of the penalty hints at significant wrongdoing, the bank has been able to get away without admitting any significant details about its past misconduct, the identities of those responsible or the magnitude of its violations. This makes it impossible to know whether the penalty levied is appropriate. Justice may or may not have been done; it has certainly not been seen to be done. This is particularly troubling given the immunity conferred by the DoJ on JPMorgan for civil claims in respect of past wrongs.

 

The reluctance of the authorities to apply sanctions beyond escalating fines is something that has troubled the courts themselves, when called upon to sanctify similar settlements and deferred prosecution agreements. A complaint increasingly heard from the bench is that banks should not be allowed to settle without admitting to past misconduct. Yet this is precisely what JPMorgan has been permitted to do.

 

Since his testimony, Mr Holder has argued strenuously that he did not intend to suggest that any banks are “too big to jail”. This argument would carry more conviction were he to have placed the JPMorgan deal under a judge’s nose to begin with.

 

Whether or not its legal challenge succeeds, Better Markets has highlighted some troubling issues. Settling without admission is another form of moral hazard. While the public feels that the bankers have got away with it, the air will not be cleared.