A history of greed, mismanagement, deregulation, and weak regulatory oversight has created a litany of banking and financial system crises over the last 40 years. Future crises can be prevented by:

• Reversing the deregulation of a 2018 law,
• Strengthening regulation,
• Increasing deposit insurance, and
• Making bank executives personally liable and culpable.

(Note: If you find my posts too much to read on occasion, please just read the bolded portions. They present the key points I’m making.)

Greed and mismanagement by bank executives led to the collapse of three banks in early March. Deregulation of “mid-size” banks in 2018 and 2019, along with failures of banking oversight by the Federal Reserve (the Fed), were also major factors in the banks’ collapses. The Chair of the Federal Reserve, Jerome Powell, bears significant responsibility for the conditions that led to these bank failures. (See this previous post for more details.)

The ultimate trigger for the collapse of Silicon Valley Bank (SVB), the first of the three to collapse, is an interesting story of conflicts of interest and hypocrisy. On Wednesday afternoon, March 8, SVB announced it needed to raise capital, presumably because the value of its long-term bond holdings had fallen, meaning its assets weren’t sufficient to meet its required level of capital. Hearing this, the venture capitalists who had invested in many of the companies with deposits at SVB, warned their companies (who further spread the word) that SVB was in trouble and they should withdraw their deposits. This was especially important for those with deposits above the $250,000 federal insurance cap, which was 90% of SVB’s depositors and 97% of its deposits. For example, Roku, the media streaming company, had $500 million on deposit at SVB. As a result, depositors withdrew $42 billion from SVB in the next 24-hours, causing the bank to collapse because it could not come up with sufficient cash to cover the withdrawals. [1]

The venture capitalists and the start-up companies, along with the failed banks’ executives, then insisted that the federal government should cover the uninsured deposits (roughly $175 billion) and make cash available to depositors immediately (both of which it did), even though they were the ones who had triggered the run on the bank that led to its collapse. Furthermore, the venture capitalists (who I believe deserve the moniker “vulture capitalists”) threatened to withdraw money from other banks and cause them to collapse if the government didn’t fully cover the deposits at the three failed banks. The resultant bailout is, in effect, a gift to a few very wealthy people who are happy to walk away with the profits of their risky behavior while dumping the costs of its failures on the government and taxpayers. Furthermore, until they need a bailout, they demand that government should stay out of their business.

This is a blatant display of hypocrisy, as many of these venture capitalists and bankers had pushed (and will push again, undoubtedly) for the deregulation that was a major contributing factor to the banks’ collapses. Notably, SVB CEO Greg Becker had vigorously lobbied for the 2018 law that dramatically reduced regulation of his bank.

The history of bank and financial deregulation is one of repeated bank and financial system crises. Most notably, there were the savings and loan crisis in the late 1980s and 1990s, and the financial collapse of 2008. In addition, there were the junk bond scandal of 1990, the Prudential Insurance scandal in 1994, the dot-com bubble bust of 2000 – 2002, and the Enron scandal of 2001. There have also been small numbers of banks failing from time to time as has just happened.  [2]

This history makes it clear that strong regulation of banks and the financial industry is necessary. Banking by institutions with federally (i.e., taxpayer) insured deposits should be safe and boring. Financial activities with high risk and potentially higher returns should be separated from insured bank deposits. This is what the Glass-Steagall Act did until it was repealed in 1999.

To prevent future banking and financial system crises, the following steps should be taken:

• Reverse the deregulation of the 2018 law,
• Strengthen regulation,
• Increase deposit insurance, and
• Make bank executives personally liable and culpable.

REVERSE THE DEREGULATION: Key provisions of the 2018 deregulation law, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP), should be reversed. Most notably, the provision that exempted “mid-size” banks (i.e., those with assets of $50 billion to $250 billion) from most regulation should be repealed. The argument was that these banks weren’t systemically important and therefore didn’t warrant strong regulation. Recent events have proved this wrong as the Federal Reserve formally declared the failure of these three “mid-size” banks as a systemic crisis. A multi-trillion-dollar bailout program was required to stabilize the banking industry.

STRENGTHEN REGULATION: The further weakening of regulations for “mid-size” banks (in addition to those in the 2018 law) that the Fed put in place in 2019 should be reversed. Regulations required or allowed by the 2010 Dodd-Frank law that have still not been implemented, such as regulation of bank executives’ compensation, should be implemented quickly and strongly. Dodd-Frank prohibits compensation that incentivizes inappropriate risk-taking, such as compensation heavily based on a bank’s stock price. Because of the Feds’ failure to implement this prohibition, between 2019 and 2022, SVB CEO Becker made $58 million from stock-based compensation as the SVB stock price went from $100 to $700 over six years due to his inappropriate risk-taking. [3]

The use of Deferred Prosecution Agreements (DPAs) must stop. These are settlements with regulators where banks pay fines and agree to stop bad behavior, but there’s no prosecution of executives. DPAs have become the norm since 2003. Bank executives used to be prosecuted, as in the savings and loan crisis of the 1980s and 1990s when more than 1,000 bank executives were prosecuted and many went to jail.

SVB ignored six formal warnings from the Fed over the course in 2021 and 2022, apparently assuming (correctly) that there would be no consequences. The Fed did little to follow-up on or enforce its warnings. This must change. Furthermore, SVB had no chief risk officer for almost a year. [4] [5]

INCREASE DEPOSIT INSURANCE: Deposit insurance by the Federal Deposit Insurance Corporation (FDIC) should be increased, along with appropriate fees to pay for it. The current $250,000 limit should be increased substantially, perhaps to $10 million, as even a relatively small business today needs more than $250,000 on hand to meet payroll and other routine expenses. [6]

My next post will describe how bank executives should be held personally liable and culpable for the failures of their banks. It will also present some specific steps that can be taken to prevent future banking and financial system crises.

[1]      Dayen, D., 3/13/23, “The Silicon Valley Bank bailout didn’t need to happen,” The American Prospect (https://prospect.org/economy/2023-03-13-silicon-valley-bank-bailout-deregulation/)

[2]      Miller, K., 3/21/23, “Seeking the roots of banking turmoil,” The Boston Globe

[3]      Anderson, S., 3/21/23, “Curbing bad behavior of bank CEOs isn’t as hard as they make it seem,” Common Dreams (https://www.commondreams.org/opinion/curbing-big-bank-ceo-greed)

[4]      Dayen, D., 3/21/23, “The Fed’s Silicon Valley Bank coverup won’t work,” The American Prospect (https://prospect.org/economy/2023-03-21-fed-supervision-silicon-valley-bank)

[5]      Smialek, J., 3/20/23, “Failed bank ignored Fed’s warnings,” The Boston Globe

[6]      Smialek, J., 3/20/23, see above

Deregulation of “mid-sized” banks in 2018 and 2019, along with failures of banking oversight by the Federal Reserve, led to the collapse of three banks in the last ten days. The Chair of the Federal Reserve, Jerome Powell, bears significant responsibility for the conditions that allowed these bank failures to occur.

(Note: If you find my posts too much to read on occasion, please just read the bolded portions. They present the key points I’m making.)

The collapse of three banks in the last weeks has been widely reported. What hasn’t been nearly as widely reported are the factors that led to these failures. Greed and mismanagement by the banks’ executives caused their collapses, of course. However, this wouldn’t have happened without deregulation and failures of oversight by bank regulators (primarily the Federal Reserve). Deregulation in banking and other industries over the last 40 years has not lived up to its promises of greater efficiencies and better products and prices for consumers. Moreover, in many cases, it has harmed employees, customers, and taxpayers. (See this previous post for more details on the failures of deregulation.)

This banking system crisis is a somewhat surprising repeat (on a smaller scale) of the banking crisis in 2008, although it was predictable in some experts’ eyes. Again, as in 2008, fifteen short years ago, the banks and wealthy depositors are being bailed out by the federal government.

After the 2008 debacle, the Dodd-Frank Act was passed in 2010 to enhance bank regulation and (hopefully) prevent a recurrence. However, Dodd-Frank wasn’t as strong as many experts would have liked and efforts to weaken it further began immediately. These efforts were led by the banks and Wall St. financial corporations, with support from most Republicans and some Democrats – and some of the federal banking regulators. The efforts included a focus on weakening and delaying the implementation of the regulations required by Dodd-Frank.

In 2018, the Trump administration and the Republicans in control of Congress (with some Democratic support), passed a law significantly reducing banking regulation, primarily for “mid-sized” banks (i.e., ones with assets between $50 billion and $250 billion). The three banks that collapsed recently are in this group.

The Chair of the Federal Reserve (the Fed), Jerome Powell, lobbied for the 2018 deregulation law, despite the fact that the Fed is the primary regulator of these banks. He is a former investment banker and was nominated to the post by President Trump. Many supporters of strong banking regulation were dismayed when President Biden renominated him in 2021.

The collapse of these three banks is due in part to the failure of the Fed’s oversight (what’s referred to in the business as “supervision”). Banking experts, investors, rating agencies, and even some in the media had identified risks at Silicon Valley Bank (SVB) that the Fed seems to have missed or ignored. SVB was the first of the three banks to collapse and is the 2^nd biggest bank failure in U.S. history. (There would have been other bigger ones in 2008 if the government hadn’t stepped in to rescue them.) SVB had grown rapidly, had deposits largely from one industry and from companies that were inter-related, had significant individual deposits over the insurance limit of $250,000, and had invested lots of its cash in long-term investments that heightened risk if interest rates went up or depositors wanted money back on short notice. All of these factors are flags that should have drawn the attention of the Fed long before SVB’s collapse. Senator Warren (D-MA) and other banking watchdogs have called the collapse of these three banks a glaring failure of oversight by the Fed.

The federal government released a statement on Sunday, March 12, to reassure the public about safety and security of the country’s banking system and their bank deposits. Fed Chair Powell delayed the release of the statement with his insistence that the statement not mention the failures of the Fed in overseeing SVB and other banks. [1]

On March 15, Senator Warren sent a scathing 10-page letter to Fed Chair Powell detailing his and the Fed’s role in aiding and abetting the collapse of these banks. She wrote to Powell that these banks collapsed “under faulty supervision and in a weakened regulatory environment that you helped create.” She noted that Powell had “led and vigorously supported efforts to weaken the regulations” for these banks. In 2018, Powell, as Fed Chair, supported the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP), which rolled back some provisions of the Dodd-Frank law, dramatically weakening regulation of banks, particularly those with $50 billion to $250 billion in assets. At that time, a Wall Street Journal editorial warned that the bill would make the financial system more vulnerable and a Bloomberg editorial warned that the bill chipped away at the bedrock of financial resilience. Powell supported it anyway.

Furthermore, in 2019, Powell took additional deregulatory steps that weakened or eliminated guardrails that would have applied to SVB. As he was doing so, a federal Reserve Board member warned that safeguards at the core of the system were being weakened. A Federal Deposit Insurance Corporation (FDIC) Board member objected to Powell’s deregulatory steps, warning at the time that they significantly underestimated the risks of banks SVB’s size, noting that banks of this size experienced significant stress in the 2008 debacle and would have collapsed without government bailouts.

Just three days before the SVB collapse, when asked by Senate Republicans if he would continue to weaken banking regulation, Powell replied, “Yes, I can easily commit to that.” Ironically, Powell’s strong and persistent push to raise interest rates causes the value of long-term bonds to fall. SVB and other banks holding long-term bonds therefore would see the value of their investments fall which would threaten their ability to sell them to deliver cash to depositors. This was a key factor in the collapse of SVB and, although Powell’s actions at the Fed precipitated it, he and the Fed apparently did not anticipate their negative effects on banks.

Senator Warren’s letter concludes by noting that Powell contributed to the bank failures in three ways:

• Powell actively supported legislation that weakened the Dodd-Frank law,
• Powell implemented regulations that further weakened bank regulation, and
• Powell failed to ensure that the oversight of the Fed was effective in preventing the banks’ collapses.

Warren’s letter states that Powell should recuse himself from the internal review the Fed has announced into the oversight and regulation of SVB, given his direct involvement in and responsibility for the chain of events that led to the bank’s collapse.

As-of March 17, a week after SVB’s collapse, it and other banks that have collapsed or are at-risk have borrowed a total of $165 billion from the Fed to bail them out. The U.S. Treasury and the FDIC have committed to protect all depositors at the failed banks, bailing out the start-up companies and their venture capital funders, particularly the ones that had over $250,000 on deposit at a bank that collapsed.

My next post will provide a few more details about the collapse of these three banks and will discuss efforts to prevent this from happening again.

[1]      Johnson, J., 3/17/23, “‘An abomination’: Powell cut mention of regulatory failures from bank bailout statement,” Common Dreams (https://www.commondreams.org/news/powell-cut-regulatory-failures-mention)

Here are eight recent examples of corporate corruption and of the overall corruption of our current system of capitalism, in which a lack of regulation of large corporations and Wall Street allows greed to run rampant. The frequency of these incidents is astounding; they are reported on a daily basis. The varied examples below document a breadth of greed-driven corruption that puts lives in danger, destroys news reporting that is essential to a well-functioning democracy, and makes the stock market vulnerable to manipulation and our financial system vulnerable to criminal money laundering. (This previous post highlighted three other examples of corrupt capitalistic behavior.)

Example #1: The power outage in Texas has dramatically illustrated what happens when the private sector is not properly regulated. This is, of course, particularly important when we rely on the private sector to deliver a vital public service (e.g., electricity or water) or an essential public product (e.g., health care supplies or food). In Texas, the private electric power generation companies and the private electric grid manager decided in the 1930s to avoid federal regulation by refusing to participate in the national power grid. Then, they got Texas regulators to let them cut corners to maximize profits. The result is an electric power system that doesn’t have the capacity to respond in an emergency and, therefore, left millions of people in the dark and cold, jeopardizing their health, safety, and, indeed, their lives, during a recent mid-February cold snap. [1]

Example #2: The wild fluctuations in GameStop stock, a small, previously little-known company, have focused attention on weaknesses in the regulation of the stock market and of the companies that facilitate stock trading. GameStop stock shot up from $4 to $5 a share in August to $20 in mid-January to $483 in late January. It then fell back to $41 by mid-February. This roller coaster ride has highlighted the risks and often unfair environment that individual investors face in the stock market, which is dominated by sophisticated, powerful, and wealthy traders, who too often are further advantaged by access to inside, non-public information. [2]

Example #3: Three big drug distributors (Cardinal Health, AmerisourceBergen, and McKesson) and Johnson & Johnson are paying big fines (a total of $26 billion) as part of the settlement for fraudulently marketing and selling opioids, which led to drug addictions, overdoses, and tens of thousands of deaths. However, they are deducting these fines from their taxes, reducing what they owe the government by a combined $4.6 billion. Under the settlement, the four companies will avoid having to admit to any guilt, wrongdoing, or legal responsibility. Many people involved with this case feel that the fines are too low based on the damage that was done and that the tax deductions and the lack of any admission of guilt are insulting to the victims. [3]

Example #4: Tribune Publishing, one of the last newspaper chains not already owned and gutted by private equity or hedge fund vulture capitalists, is being bought by the Alden Global Capital (AGC) hedge fund. AGC, along with other vulture capital newspaper purchasers, has consistently maximized financial returns by cutting the newspapers’ staffs, selling their real estate, busting their unions, and eliminating their pension liabilities, while pocketing as much cash as possible and loading debt onto the newspaper companies, often pushing them toward bankruptcy. The Tribune papers that will almost certainly be similarly decimated are in Chicago, Baltimore, Hartford, Orlando FL, New York (the Daily News), Annapolis, Allentown, Newport News, and Norfolk VA. AGC now owns over 200 newspapers. This purchase (and the others like it) is possible because of a lack of antitrust enforcement and special tax law provisions that favor debt-financed acquisitions and payment of special dividends from companies operating at a loss. [4]

Example #5: An investor lawsuit against Boeing is moving forward based on claims that the Board of Directors and management failed to uphold their responsibilities to shareholders relative to the safety issues and crashes of the 737 Max airplanes. Two of the planes crashed in the spring of 2019 killing 346 people. The suit questions the Board’s and management’s roles both in the initial testing of the plane and its software, and their actions after the crash of the first plane, when they decided not to ground all the 737 Max planes. Boeing has already agreed to pay more than $2.5 billion to resolve criminal charges that it conspired to defraud the Federal Aviation Administration (FAA) during the plane’s safety review and certification. The Board did fire Boeing’s CEO in 2020, but gave him a $62 million severance package. [5]

Example #6: Bristol-Myers Squibb and Sanofi, who jointly market the blood-thinning drug Plavix, were ordered by a judge to pay the State of Hawaii over $834 million for illegally marketing the drug. For 12 years, they failed to properly warn consumers about health risks and didn’t disclose that the drug was ineffective for up to 30% of users, both of which put some users’ lives at risk. They engaged in these practices in order to maximize their profits. [6]

Example #7: Google has agreed to pay a $1.3 million fine to French fraud and competition regulators for displaying misleading rankings for French hotels on Google Maps and in Search results. [7]

Example #8: Citigroup, parent of Citibank, was fined $400 million for deficient financial controls and related technology. In an ironic example of its lack of controls, Citibank, in what it says was a mistake, transferred over $500 million to a client’s lenders while intending to make a much smaller interest payment. A judge recently ruled that the lenders do not have to return the money. [8]

[1]      Cox Richardson, H., 2/16/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/february-16-2021)

[2]      Rosen, A., 2/18/21, “Mass. Investor ‘Roaring Kitty’ says he wasn’t part of any coordinated effort to boost GameStop,” The Boston Globe

[3]      MacMillan, D., & Schaul, K., 2/12/21, “Drug companies seek billion-dollar deductions from opioid settlement,” The Washington Post

[4]      Kuttner, R., 2/17/21, “Private equity swallows up yet another newspaper group,” The American Prospect blog (https://prospect.org/blogs/tap/private-equity-swallows-up-yet-another-newspaper-group/)

[5]      MacMillan, D., 2/17/21, “Boeing directors misled on safety, investor lawsuit claims,” The Boston Globe from the Washington Post

[6]      Bloomberg News, 2/16/21, “Bristol-Myers, Sanofi must pay $834 million over Plavix,” The Boston Globe Talking Points

[7]      Associated Press, 2/16/21, “Google fined $1.3M for misleading French hotel rankings,” The Boston Globe Talking Points

[8]      Bloomberg News, 2/17/21, “Citigroup loses $500 million legal battle over transfer blunder,” The Boston Globe Talking Points

Here are three recent examples of corrupt corporate behavior in the financial industry, where corruption is persistent and seems to know no bounds. The exposure of corruption and its triggering of the 2008 financial crash doesn’t seem to have changed anything. It seems that every week there’s another report of serious corruption in the financial industry. Here are three examples that show the depth and breadth of that corruption: one of long-term systemic corruption at a major bank, one of a specific example of corruption from a different major bank, and one from a small, relatively new member of the industry. (This previous post highlighted three other examples of corporate corruption, two from the pharmaceutical industry and one from the financial industry.)

Example #1: Deutsche Bank has fallen from the second largest bank in the world in 2008 to the 21^st largest in 2020 due to a wide range of corrupt behavior that finally caught up with it. It postponed its financial collapse and shrinkage by overvaluing its assets, among other fraudulent accounting strategies. Its history of corruption is meticulously detailed in the book, Dark Towers. [1] In 2018, its long-time involvement in tax evasion and money laundering for wealthy individuals resulted in police raiding its Frankfurt, Germany, headquarters. This wasn’t the first time this had happened. In 2012, hundreds of government police had raided its office to gather evidence in a different tax evasion scheme that involved permits for carbon dioxide emissions.

Since 2012, Deutsche Bank has paid over $15 billion in settlements for illegal activities. As-of 2016, it was involved in over 7,000 legal cases and had set aside over $5 billion for the potential impact of those cases. It was a major contributor to the 2008 financial crash, which led to its payment in 2017 of over $7 billion in settlements for fraud in its sales of mortgage-backed securities. In 2015, it agreed to pay a fine of $2.5 billion for manipulating international interest rates, pleading guilty to fraud and agreeing to fire 29 employees who had been involved. (Not a single individual was charged with a crime, however.) In 2017, it was fined over $600 million for money laundering that moved over $10 billion of suspicious money out of Russia. In 2018, it agreed to pay $75 million to settle charges of improperly handling U.S. transactions involving foreign securities.

Deutsche Bank is or has been investigated for numerous other corrupt behaviors including manipulating foreign currency exchange rates and violating international sanctions by engaging in over $10 billion of illegal financial transaction with Iran, Syria, Libya, Sudan, and other sanctioned countries. Some of these transactions involved funding for terrorism and drug trafficking. It is under investigation for participating in a criminal cartel in Australia, $150 billion of money laundering with a Danish bank, and a multi-billion fraud scheme with a Malaysian development fund. And by the way, it has engaged in illegal spying on its critics. Its corruption goes back at least to the 1930s when it cooperated with the Nazis and funded their activities, which it tried to hide for many years thereafter.

Example #2: Goldman Sachs, the fifth largest U.S. bank, has agreed to pay $3 billion to regulators in multiple countries for a massive bribery scheme that stole hundreds of millions of dollars from the Malaysian government. Goldman Sachs took in $593 million in unusually large fees for its role in the underlying transactions. Although two of its executives have been indicted (a partner and a managing director) and its Malaysian subsidiary has pleaded guilty to bribery, many have criticized the settlement as not being a meaningful punishment both because of the scale of the criminal activity and the dollar amount of the settlement, which is less than 3 months of profits. Furthermore, Goldman Sachs has only partially cooperated with the investigation, delayed providing crucial information, and failed to self-report illegal activity that it knew about and is required by law to report. [2] By the way, this will bring the fines it has paid out since 1998 to over $10 billion. [3]

Example #3: Robinhood Financial LLC, a 2015 start-up that provides a smart phone app for buying and selling stocks, has agreed to pay a $65 million penalty to the federal Securities and Exchange Commission for misleading customers and costing them an estimated $34 million. Robinhood advertised no commission trades, however, it generated revenue by executing customers’ trades through companies that paid it fees for the trades. It failed to disclose this to its customers. It had an incentive to select companies that paid it the most for those trades even if customers got worse prices on the stocks they were buying. Nonetheless, Robinhood claimed the quality of its execution of its customers’ trades was as good or better than its rivals. [4] In addition to this federal settlement, Massachusetts regulators are pursuing a complaint against Robinhood for violating state securities laws by not providing accurate information to customers. The complaint also states Robinhood’s website has had several outages that have prevented customers from trading during important periods when stock prices were shifting significantly. [5]

To put financial industry corruption in a larger perspective, often federal cases of financial misbehavior, as in the Deutsche Bank and Goldman Sachs cases above, result in the financial corporations signing a Deferred Prosecution Agreement (DPA). This requires the corporation to pay a fine and agree to a period of probation (during which it promises not to repeat its bad behavior), but usually the corporation and its executives avoid criminal prosecution. However, there are multiple examples of money laundering cases against big banks where the corporations had already signed DPAs in previous money laundering cases, repeated their bad behavior, and received the same lenient treatment all over again. As a result, the big financial corporations appear to view fines for corrupt behavior as a routine cost of doing business. [6]

The persistence of corruption in the financial industry makes clear the need for stronger steps to deter future illegal behavior. Stronger government regulation and significant financial and criminal punishments for the corporations (e.g., truly significant fines and, ultimately, revocation of their corporate charters, putting them out of business) and for their executives (e.g., jail time and personal fines) are needed. The industry and its supporters among our elected officials have fought back hard and largely successfully against efforts to strengthen regulation and consumer protection in the wake of the 2008 financial collapse, so not only is there much work to do but, in addition, it will be a tough fight.

[1]      Enrich, D., 2020, “Dark Towers,” HarperCollins Publishers, NY, NY.

[2]      Woodman, S., 11/2/20, “Goldman Sachs 1MDB settlement: a meaningful punishment for major financial crimes?” International Consortium of Investigative Journalists (https://www.icij.org/inside-icij/2020/11/goldman-sachs-1mdb-settlement-a-meaningful-punishment-for-major-financial-crimes/)

[3]      Collins, C., 11/30/20, “Petulant plutocrat of the week,” Inequality.org weekly blog post from the Institute for Policy Studies (https://inequality.org/wp-content/uploads/2020/11/inequality-newsletter-november-30-2020.html)

[4]      Michaels, D., & Osipovich, A., 12/17/20, “Robinhood Financial to pay $65 million to settle SEC probe,” The Wall Street Journal

[5]      Denham, H., 12/18/20, “Robinhood agrees to $65m penalty to resolve SEC charges,” The Boston Globe from the Washington Post

[6]      Woodman, S., 11/2/20, see above

ABSTRACT: If you follow the financial news, you regularly hear about financial corporations paying penalties as they reach settlements with regulators for their misbehavior. Although the amounts of some of the recent penalties have been noteworthy, keep in mind that to these large corporations they barely put a dent in their annual profits. Furthermore, in many cases the penalties are tax deductible as a business expense. This means that, in effect, the government and we as taxpayers are subsidizing the penalty by allowing the corporations to reduce their taxes by deducting the amount of the penalty from their income. In other cases, the corporations are allowed to take credit for having paid all or part of the settlement based on other actions they have taken.

This has led Senators Elizabeth Warren (MA Democrat) and Tom Coburn (OK Republican) to propose a Truth in Settlements bill in Congress that would require government regulators to disclose whether they are allowing all or part of the settlement amount to be deducted from income or paid with credits.

In most cases, the corporations are agreeing to the settlements without having to admit wrongdoing. There have been very few criminal charges against the corporations and none against any executive of any of the large financial corporations. Furthermore, the executives have continued to be lavishly rewarded despite behavior that plunged the world into a financial crisis and a recession.

If we are going to prevent another financial collapse and resulting recession, we must prevent serious misbehavior by our large financial corporations. Stronger laws, oversight, and enforcement, with stronger penalties for executives and corporations, including criminal prosecutions, are needed. These would provide the strong incentives necessary to ensure legal, ethical, and prudent behavior by executives and, hence, the corporations they run.

FULL POST: If you follow the financial news, you regularly hear about financial corporations paying penalties as they reach settlements with regulators for their misbehavior. Many of these settlements are for misbehavior that contributed to the 2008 financial collapse where enforcement actions are finally being concluded. Some are for more recent misbehavior. (See posts of 8/14/13, Large Financial Corporations Continue Illegal Activity [https://lippittpolicyandpolitics.org/2013/08/14/large-financial-corporations-continue-illegal-activity/] and 8/29/12, Big Financial Corporation Scandals Continue [https://lippittpolicyandpolitics.org/2012/08/29/big-financial-corporation-scandals-continue/] for more detail on financial corporations’ misbehavior.)

Although the amounts of some of the recent penalties – in the billions of dollars – have been noteworthy, keep in mind that to these large corporations this barely puts a dent in their annual profits. Their stocks have been performing well, despite the penalties. In many cases the penalties are tax deductible as a business expense, which means that the impact on the corporation is typically only two-thirds of the stated amount. As a result, in effect, the government and we as taxpayers are subsidizing the penalty by allowing the corporations to reduce their taxes by deducting the amount of the penalty from their income. In other cases, the corporations are allowed to take credit for having paid all or part of the settlement based on other actions they have taken. For example, in a 2013 settlement with 13 mortgage service providers for illegal foreclosures, over 60% of the announced $8.5 billion settlement could be paid through credits for modifications to existing mortgages.

This has led Senators Elizabeth Warren (MA Democrat) and Tom Coburn (OK Republican) to propose a Truth in Settlements bill in Congress that would require government regulators to disclose whether they are allowing all or part of the settlement amount to be deducted from income or paid with credits. The regulators would generally have to make settlement agreements public and for any that were kept confidential, they would have disclose that fact and their rationale for doing so. [1] Bills have also been filed to prohibit the deduction of penalties as a business expense.

In most cases, the corporations are agreeing to the settlements without having to admit wrongdoing. There have been very few criminal charges against the corporations. Most of the enforcement actions have been civil actions, which seriously limits the consequences, even if the corporation misbehaves again, even in a similar manner.

Also noteworthy, is that no executive of any of the large financial corporations has been charged with criminal activity. (My next post will explore this issue.) Furthermore, the executives have continued to be lavishly rewarded despite behavior that plunged the world into a financial crisis and a recession. A corporate culture of immunity for senior executives from the consequences of their actions appears to persist despite public outrage. [2]

For example, JPMorgan’s CEO, Jamie Dimon, will be paid $20 million for 2013. This is up substantially from the $11.5 million he was paid last year, despite the $20 billion in fines and penalties JPMorgan paid in 2013 (due to a variety of corporate misbehavior) and the very large related legal expenses. Apparently, JPMorgan’s Board of Directors feels Dimon did a great job of handling these matters with the regulators and that pay cuts in 2008 and 2012 had already punished him for having gotten the corporation into trouble in the first place. [3] The corporation’s stock did have a good year. It was up 37%, out pacing both its peers and the overall market. (Note: If JPMorgan’s Directors and shareholders feel the settlement agreements were so positive, maybe the regulators have let Dimon and JPMorgan off too lightly!) In 2008, Dimon received a $1 million salary and no bonus, presumably because of the problems that led to the financial crisis and the need for the government to bail out JPMorgan (among other financial industry corporations). However, by 2011 his compensation was up to $23 million. It was cut to $11.5 million for 2012, which was viewed as a strong rebuke by the corporation’s Board for the $6 billion loss on speculative trading that occurred in 2012.

Final figures for 2013 CEO compensation at two smaller financial corporations, Goldman Sachs and Morgan Stanley, were not available yet, but are expected to be above the 2012 levels that were $21 million and $9.75 million, respectively.

If we are going to prevent another financial collapse and resulting recession, we must prevent serious misbehavior by our large financial corporations. Stronger laws, oversight, and enforcement, with stronger penalties for executives and corporations, including criminal prosecutions, are needed. These would provide the strong incentives necessary to ensure legal, ethical, and prudent behavior by executives and, hence, the corporations they run.

ABSTRACT: The large US financial corporations, whose illegal and unethical activities caused the 2008 financial crash and recession, continue to engage in a wide variety of illegal activity. Clearly, the fines and penalties they’ve paid to-date, although hundreds of millions of dollars, haven’t been sufficient to deter them. Or they are so large and so impossible to manage that they are just out of control. The only way to reduce the risk to our financial system and economy, and to stop these illegal activities, is to break them up and institute much tighter regulation.

Their past behavior includes fraudulent creation of mortgages and the fraudulent packaging and selling of risky mortgage-backed securities, fraudulent foreclosures on home owners, manipulation of interest rates in multiple settings, money laundering for criminals and countries under international sanctions, and out-of-control speculative trading. Despite this, it doesn’t look like any senior managers will be charged with criminal activity.

More recently uncovered activities include speculation in and manipulation of commodities markets that costs consumers billions, fraudulent debt collection practices, and the selling of inappropriate securities to, among others, elderly investors seeking secure investments.

These are highlights of what we know about, and, therefore, are the tip of an iceberg of unknown size. The executives who profit (through pay, bonuses, and stock options) from these criminal and unethical activities currently have no reason to stop committing or allowing them.

The variety of illegal activities, the involvement of literally all the large financial corporations, and the scale of the impact on our economy and us individually is breathtaking. We need better laws and regulation overseeing these large financial institutions. See my posts of 8/6 and 8/4 for steps that are needed to move in that direction, including petitions of support you can sign.

FULL POST: The large US financial corporations, whose illegal and unethical activities caused the 2008 financial crash and recession, continue to engage in a wide variety of illegal activity. Clearly, the fines and penalties they’ve paid to-date, although hundreds of millions of dollars, haven’t been sufficient to deter them. Or they are so large and so impossible to manage that they are just out of control. In either case, they present a significant risk for another financial collapse, another possible bailout, and another recession. The only way to reduce the risk to our financial system and economy, and to stop these illegal activities, is to break them up and institute much tighter regulation. This is what the 21^st Century Glass Steagall Act, recently proposed in the US Senate (see post of 8/6/13), and the Dodd-Frank Act (if appropriately implemented) would go a long way toward doing.

You probably remember the fraudulent creation of mortgages and the fraudulent packaging and selling of risky mortgage-backed securities as “safe” investments. These activities were key contributors to the 2008 financial system collapse. You may remember that these same handful of corporations engaged in fraudulent foreclosures on home owners, manipulation of interest rates in multiple settings, money laundering for criminals and countries under international sanctions, and out-of-control speculative trading (which cost JPMorgan $6 billion in early 2013). Many of these activities are still under investigation with penalties still to be finalized, but it doesn’t look like any senior managers will be charged with criminal activity. (In the Savings and Loan crash of the late 1980s, which was less than one-tenth the size of the 2008 crash, over 1,000 senior managers were convicted of felonies.) (See posts of 8/29/12 and 7/12/12 for more detail.)

Here are some other examples of illegal or unethical behavior by the large financial corporations that have come to light more recently.

Their speculation in and manipulation of commodities markets costs consumers billions. This includes oil and gasoline (see post of 3/5/12 for more detail), electricity, aluminum, wheat, cotton, coffee, and other commodities. [1] In the last year, US regulators have accused three financial corporations of manipulating electricity prices, including JPMorgan, which recently agreed to a $410 million settlement. [2][3]

In the commodities market for aluminum, Goldman Sachs and others make millions in profits that end up costing consumers many times that. Using special exemptions from the Federal Reserve and relaxed regulations approved by Congress, the large financial corporations have purchased much of the infrastructure used to store and deliver aluminum (and other commodities) as they are traded on commodities exchanges. Three years ago, Goldman Sachs bought one of the largest firms storing and delivering aluminum; almost a quarter of the supply of 1,500 pound aluminum bars bought and sold on commodities exchanges is in its 27 warehouses (1.5 million tons). Goldman, over the last three years, has increased the delivery wait time for customers from an average of six weeks to roughly 70 weeks. This significantly increases the rent and fees paid to Goldman for the storage and delivery of the aluminum in its warehouses. [4][5][6]

JPMorgan and other big financial corporations are under investigation for their debt collection practices. It has recently come to light that their efforts to collect delinquent credit card debt have suffered from faulty or forged documents, improperly reviewed documentation, and failure to notify debtors of legal filings. These are some of the same practices that resulted in the lawsuits and settlements over improper home foreclosures! [7]

Morgan Stanley just settled claims that it sold inappropriate securities to, among others, elderly investors seeking secure investments. [8]

These are highlights of what we know about, and, therefore, are the tip of an iceberg of unknown size. The amounts of the fines and settlements sound large, but they’re just a cost of doing business when compared to the revenue and profits at these mega-financial corporations. (See post of 2/20/12 on the mortgage foreclosure settlement for an example with more detail.) Because shareholders and not corporate executives bear the cost of these settlements, and, furthermore, they are subsidized by us as taxpayers because they are typically considered a business expense (which reduces taxable income), the executives who profit (through pay, bonuses, and stock options) from these criminal and unethical activities have no reason to stop committing or allowing them. And the record shows they are continuing. [9]

The variety of illegal activities, the involvement of literally all the large financial corporations, and the scale of the impact on our economy and us individually is breathtaking. We need better laws and regulation overseeing these large financial institutions. See my posts of 8/6 and 8/4 for steps that are needed to move in that direction, including petitions you can sign to support such actions. (See posts of 7/31/12, 5/31/12, 5/29/12, 3/25/12, 3/23/12, and 2/29/12 for more on the need for regulation of these giant financial corporations.)