Annals Of Government Self-Promotion, Big Bank Edition

What was the main cause of the financial crisis that hit in 2008/9?  You've probably noticed that there are two main narratives.  In one, the government caused a huge bubble in housing and other asset prices through imprudent guaranties and secondary market purchases by their agents, mainly Fannie and Freddie.  And in the other narrative, greedy bankers caused the bubble by some combination of predatory lending, toxic derivative products, and shady trading.   

Well, one of those narratives would imply that the solution is to shrink government involvement in the financial sector, and the other would suggest that the solution would be yet more government involvement and regulation.   

And thus we have the exceedingly strange phenomenon of the government at the same time propping up the big banks and also requiring the same big banks over and over again to enter into huge monetary settlements as supposed compensation for the wrongdoing that led to the crisis.   The money just goes around in a big circle.  In fact, the way I see it far more money goes from the government to the big banks than the other way around.  But the money going from the government to the big banks is largely invisible and hard to quantify.  The money coming back is in the form of highly publicized settlements that gives the government the chance to support its narrative that the banks are guilty and the government must grow.

First, today's news.  Citigroup has settled with Fannie and Freddie for some $968 million, covering claims by the mortgage twins that their losses in the financial crisis were caused by Citi.  Frankly, I find it rich that Fannie and Freddie would even have the nerve to assert such claims, given their own history of setting almost all the terms of the lax bubble credit markets.  But the fact is, the case was never real.  Of course Citi would have to settle for some huge number, because it completely owes its existence and continuance to political favor from Washington.  So these claims were never going to be tested in court.

This latest settlement is of course a small part of the public penance and atonement that the big banks have been forced to undergo.   Bank of America settled similar claims from Fannie and Freddie for $2.8 billion just last January.  And how about the $25 billion settlement between and among five big banks (Ally, BofA, Citi, JPMC and Wells Fargo), 49 state AGs and the Federal government (HUD and Justice Departments) for supposed wrongful activities in enforcing under-water mortgages?  That was in January 2012.  And then those same banks and another five turned around in January 2013 and settled so-called "robosigning" claims again, this time by the Office of Comptroller of the Currency, for $8.5 billion.  Then there was Citi's settlement of $158 million with the FHA over allegedly providing false information in support of the issuance of guaranties.  That was February 2012.   Here's a list from the Daily Beast of some ten settlements of $50 million and up (only two are under $100 million) entered into between JPMC and various Federal agencies in just the two years from April 2011 to March 2013.  The article helpfully points out that even after all these settlements there are still eight federal agencies currently conducting ongoing investigations of that bank, so there should be many more settlements coming.  I could go on, but you get the point.  The Daily Beast quotes an estimate of $16 billion for the legal costs of just JPMC since 2009.

Well, where do they even get all this money?  The simple answer is, the government gives it to them through the back door.  First, the massive bond buying programs by the Fed (QE 1, 2, 3, . . . .) have driven the banks' cost of funds basically to zero for years, with spreads between what banks pay on deposits (nothing) and what they earn on loans (something) at record levels.  And then there's "too big to fail" in Dodd-Frank, a huge giveaway to the banks in that category, who get several notches of benefit in their cost of funds.  Between those two, it's billions and billions of dollars, but there's no way to quantify it specifically. 

Here's the take on this situation from the Daily Beast (Nina Strochlic, May 8, 2013)

Screw over customers, botch foreclosures, run afoul of important regulations, and violate some important rules—and the worst you’ll have to do is pay some fines or settlements. It’s a cost of doing business, even for America’s most highly regarded banks.

Sorry Nina, but I think you're getting taken in.  Not that I'm going to stand up for everything every big bank has done; I'm sure that there's plenty to criticize.  But $33+ billion for flaws in mortgage foreclosure?  In the old days, if you botched the paperwork on a mortgage foreclosure, the worst that would happen to you would be that you had to start that one over.  And that's just one piece.  The banks are subject now to thousands upon thousands of pages of regulations.  There is no possible way to comply perfectly.  Basically, any Federal agency that wants its name in the paper can pick one of the big banks and go out and get at least a few hundred million.  Sorry, but this is a very sick game of government aggrandizement with funds provided by the taxpayers through the backdoor.