Both banks and governments often make big mistakes at forecasting the economic and financial future.
Labor Day Reflections: Banking, and Working, in America
Labor Day (as I write this) invites a prayer of petition for the un- and under-employed—and an equally heartfelt prayer of thanksgiving for anyone in this country who is still willing and able to work. Considering the output of our public institutions, that’s a bona fide miracle. E.g., recent news reports suggest that bankers are either idiots or saints. People who work for them or buy their shares aren’t far behind.
Bloomberg News reports that the six biggest U.S. banks have racked up $103 billion in legal costs and fees since the financial crisis. Bank of America and JP Morgan Chase account for about three-quarters of the cost; Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley account for the rest. In related news, an M&T study showed that fines, sanctions and legal awards against the six largest U.S. based banks soared to $29.3 billion last year. That’s more than double the $13.9 billion of 2011 and dwarfs the $9 billion of the 10 years preceding 2011. (I haven’t been able to find the report online; George Melloan discusses it here.)
In a filing last week, JP Morgan announced a $678 million litigation expense for the quarter and said that it could face as much as $6.8 billion in legal losses beyond its reserves. The London Whale, and all that (“that” being mostly JP Morgan’s Jamie Dimon’s harsh criticism of Dodd Frank: the feds are going to make his shareholders pay for that until everyone gets the message).
This, mind you, is real money: $103 billion is more than the banks have paid in dividends over the period. And these, mind you, are the same banks that the government has sought to re-capitalize, the better to fortify them against government-sponsored runs. Why is the same government de-capitalizing them at the other end? Perhaps, to paraphrase President Reagan, because the left hand knows not what the far left hand is doing. More likely to my mind, because it serves the regulators’ narrative: we saved the banks; we’re catching the crooks.
You can follow much of the current action on White Collar Wire, which provides sage advice to bankers and, indeed, any American citizen: “Don’t read us because you’re a criminal. Read us because, some time or other, someone may think you are.” (In addition, the site provides fine literature reviews and martini recipes.) The link just provided covers a pending action (link no longer available) in the Southern District of New York. Here’s the skinny:
In January 2008, Bank of America bought Countrywide, for pennies on the dollar. Countrywide, everyone knew, had made oodles of suspect mortgage loans to everyone from Chris Dodd (of Dodd-Frank fame) to janitors with $150,000 claimed annual incomes. It sold this crap to Fannie and Freddie, which—pursuant to orders from Dodd-Frank’s other mastermind, Barnie the Dynamo—“rolled the dice a little” and bought the stuff on pro forma representations and without (the court papers say) looking at the underlying transactions. Suspecting that the game was up and Countrywide would need a bailout, U.S. regulators shepherded—engineered, forced, pick your verb—the BofA acquisition.
Come now the same regulators, saying: in selling this stuff to Fannie/Freddie, Countrywide/BofA violated FIRREA (don’t ask), 12 U.S.C. 1833a—a “hybrid” statute that piggybacks criminal prosecutions on violations of civil penalty statutes, such as mail and wire fraud “affecting a federally insured financial institution.” (The point is to dispense with ornery requirements of proof beyond a reasonable doubt.) Fannie/Freddie aren’t “federally insured,” at least not officially. However, says the government, insured banks had their assets in Fannie/Freddie; and when the Fannie/Freddie went bust, the insured institutions had to be closed or restructured. There’s your “affecting.”
It’s an interesting question whether such an “indirect effect” theory should be subject to a limitation of unclean congressional and regulatory hands. No banker ever bet of Fannie’s or Freddie’s portfolio (which everyone knew to be junk); everyone bet on the implied congressional guarantee. No need to go there, though, Judge Rakoff held in the case at hand. The violations at issue plainly “affected” the bank that had perpetrated them—BofA, to whom (or which) Countrywide’s violations are imputed. BofA has paid many, many billions—as a result of other prosecutions and settlements—to repurchase mortgages and to pay fines. There again is your effect; and the plain language of the statute permits no exception for “self-affecting” conduct. (Further evidence that raw textualism is nuts, but I’ll leave that for another day.) So the same institution that bought Countrywide at regulators’ behest and then got hammered for irregularities that the regulators knew to exist should now get whacked yet again not for what it did to someone else, but for what it supposedly did to itself.
In a recent speech that I highly recommend, Richard Fisher of the Federal Reserve (Dallas) noted that the Fed has been flooding the country with cheap money. Why, he asked, has that had so little effect? Answer, the government apparatus—“the gang that can’t shoot straight”—yanks the intended benefits off the table before they can hit the real economy. JP Morgan and BofA are doing fine, thank you; but they won’t lend, for fear that the government will confiscate the proceeds. And so it will, so long as the Fed and the stock markets cooperate.
Can you run a country like that? Sure, Richard Fisher says: the U.S. is the best-looking horse in the glue factory. On this Labor Day, America’s middle class takes a last summer respite and gets ready for work, knowing that it’s the glue that holds the country together.
Congratulations, or something.