"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
With the J. P. Morgan Chase settlement finally decided, now seems as good a time as any to discuss those most hated of all villains: Bankers.
Generally seen as undeserving of their truly obscene wealth, most people instinctively distrust their skill at jumping their horse over your front line to checkmate you on turn two when you were pretty sure you were playing checkers.
We don't understand most of what they do is what I'm trying to say there.
Also, realize that I am primarily talking about US investment bankers. Canada's banks did pretty well through the crash, primarily because Paul Martin had rejected deregulating the banks as finance minister. Instead, alone amongst the Group of 8, Canada tightened loan-loss and reserve requirements while disallowing major bank mergers. This he did while being criticized by the banks and Stephen Harper, both of whom felt it would put the Canadian financial sector at a disadvantage globally. Fortunately, they were very wrong and Canada came out in a pretty strong position bank-wise.
After the 2008 financial collapse, which was primarily brought about by greed and fraud within the banking sector, it was unclear whether the economy would recover at all. Understandably, there were a lot of people mad. In 2009, Obama spoke to the bankers and made it clear that: "My administration is the only thing between you and the pitchforks."
Fortunately for them, Obama did a damn good job of getting between them and the pitchforks to the point that none of them outside Lehman Brothers actually had to suffer at all. In fact, while 2 million Americans were losing their jobs at the end of 2008 due to the crisis, 2009 would prove to be Wall Street's best year ever. Amidst a $175 billion dollar taxpayer-funded bailout for 9 of the major banks, $32.6 billion of it was being used to provide bonuses even though 'the talent' had only managed to achieve massive losses. Despite the financial sector providing 20% of Obama's campaign funds in 2008, more than any president for the last 20 years, even he had to put his foot down and complain about the obscene culture of huge bonuses for bankers who almost destroyed capitalism.
It was this pro-Main Street, anti-Fat Cat rhetoric that would cause Wall Street to support Romney for the 2012 election, providing him $61 million and only $18.7 million to Obama. Now, I can hear you say, "Surely this lack of support and this record-breaking $13 billion dollar fine for J. P. Morgan shows that the Obama administration is finally getting tough on financial crime and taking the crooked bankers to task!"
Well, it doesn't. And don't call me Shirley.
This fine is unfortunately far less consequential than it sounds and accomplishes nothing except providing a good sound-bite that Obama is 'taking on the bankers'. Essentially, this settlement is their punishment for engaging in criminal fraud and routinely overstating the quality of mortgages it sold to investors. This includes bad loans made by Washington Mutual and Bear Stearns, two firms purchased by JP Morgan during the crash. 26-27% of the loans they packaged did not meet the guidelines investors had demanded but they knowingly lied and said they did.
This payment is likely to just be one of many as there are at least 9 other government probes into JP Morgan for various other illegal behavior. In fact, they just finished up another $4.5 billion dollar settlement with 21 institutional investors who they had ripped off. Clearly a very ethical institution. The bank currently has $23 billion set aside to deal with these other approaching litigations.
The problems with this approach to punishing banks is that it doesn't actually make them stop the behavior. First of all, the settlement doesn't actually include an admission of wrong doing. This means it can work as a shield against other lawsuits. In fact, upon announcing the $13 billion dollar settlement, their stock price would increase roughly $12 billion since smooth legal sailing was assumed from then out. Second, potentially as much as $9 billion of the settlement is tax deductible which seems to defeat the purpose. Third and most importantly, no one is going to jail.
This is a big problem because the company is raking in much more money from these illegal behaviors than it is being required to pay in fines. Thus, fines just become a cost of doing business that may possibly hurt shareholders but won't affect those who choose to commit crimes. Which means they have no reason to not commit crimes. Which is ridiculous.
In 1995, bank regulators referred 1,837 cases to the justice department. In 2006, that had fallen to 75. It has been clear for a while that when a bank breaks the law, it is generally not treated like a crime. During the late 1980's savings and loans scandal, more than 800 bank officials went to jail. This time around? None. Some fines have been paid by those who knowingly committed fraud after investigations by the Securities and Exchange Commission but there has been no jail time. It was argued this was because restoring stability was goal number one and arresting major bank executives for their crimes could destabilize the recovery.