US passes $150bn milestone in credit crisis fines

Financial institutions have paid more than $150 billion in fines in the US relating to the credit crisis, passing a significant milestone a decade after it became clear American subprime woes had become a global problem.

Ten years ago this week, France’s BNP Paribas barred investors from accessing money in funds with subprime mortgage exposure, citing a “complete evaporation of liquidity”. The date - August 9th, 2007 - is pegged by many as the moment the financial crisis began.

Financial institutions have largely recovered from the Great Recession that followed, but the crisis profoundly reshaped economies and markets, and the effects on politics and society are still being felt. Dealing with banks’ alleged misdeeds from the era also remains unfinished business.

The public outcry for accountability ushered in an era where the US government was willing to penalise financial institutions sharply, yet most crisis-related actions were civil rather than criminal. Much of the public remained unsatisfied because few bankers went to prison.

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A trio of multibillion-dollar settlements with European banks this year has netted $19 billion for the Department of Justice and regulators, including $5.5 billion paid by RBS of the UK last month – taking the total over the landmark figure.

A single bank, Bank of America, has paid more than one-third of all recoveries to US authorities, according to an analysis by the Financial Times. Its $56 billion in settlements with state and federal regulators and the US department of justice cover its own mortgage sales and actions by two companies it acquired, subprime mortgage lender Countrywide and broker Merrill Lynch.

JPMorgan Chase, which acquired Bear Stearns and Washington Mutual, has paid the second-largest amount, with $27 billion in fines and relief.

The FT analysis of fines against banks, rating agencies and other institutions covers conduct ranging from the faulty underwriting of mortgages, improper foreclosure practices and discriminatory lending to the mismarking of auction rate securities.

The bulk of the $150.1 billion total – $89.1 billion – was to settle allegations that institutions misled buyers of securities backed by mortgages.

New cases related to the crisis are still being filed and investigations continue, suggesting the $150 billion total could grow. Barclays is fighting a department of justice lawsuit alleging it misled buyers of mortgage-backed securities.

"You can argue that the fines are too high or too low. Nobody would argue that the non-compliance behaviour needs to be addressed," said Gerold Grasshoff, a senior partner with Boston Consulting Group.

Prosecutors have demanded guilty pleas from banks for crimes ranging from money laundering to violations of US sanctions law. Including those settlements, financial institutions have paid more than $321 billion worldwide from 2007 until the end of 2016 for all types of misdeeds, according to a report by Boston Consulting.

“We expect fines and penalties by regulators in Europe and Asia to rise in coming years,” the report concluded.

Some authorities have said the lack of cases against top Wall Street executives reflects the difficulty in proving criminal intent, since they were often several levels removed from the fraud or insulated by lawyers. Others suggest the DoJ was unwilling to pursue cases they might not win.

"Our nation cannot afford to take our eye off the ball when it comes to crime or other illegal practices inside banks that require law enforcement response," said Christy Goldsmith Romero, the inspector general of Sigtarp, the federal agency overseeing government bailout funds.

"If a corporation is engaged in illegal practices they should not be able to buy themselves out of accountability. The recoveries are important because there must be a cost," Ms Goldsmith Romero added. "DoJ has to be willing to step outside of its comfort zone. They have to be willing to put the evidence in the hands of the jury." – Copyright The Financial Times Limited 2017