Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Monday, November 17, 2014

An Ongoing Miasma: The Misdeeds of Big Banks

It has become a cliché to excoriate the big banks for their financial misdeeds, in large part because the public has grown tired of the litany of law-suits, controversial settlements, accusations of manipulation, cover-ups and other shenanigans.  But I'm going to write about it anyway, for a simple reason: this is no laughing matter, and it's not going away.

The inspiration for this post came from two stories, both posted on November 12th, detailing the latest corporate malfeasance.  In the first story, we learn that "some of the nation’s biggest banks ignore bankruptcy court discharges, which render the debts void. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe."  The second story informs us that a number of big banks have agreed to a $4.25 billion fine for illegal currency-rigging.

Before we go on, I'd like to present a hypothetical scenario to you.  Imagine you are considering engaging in an illegal activity--say, for instance, misleading investors so as to sell them collateralized debt obligations you know are worthless--that will generate $20 billion in profits.  You have a massive team of lawyers, of course, and discuss the legal implications of engaging in said illegal activity.

After a thorough and exhaustive review of the situation, you come to the conclusion that criminal penalties, so long as you aren't too obvious about things, are unlikely.  Now that jail time is off the table, you estimate that, after much back-and-forth, you will agree to a $7 billion fine; to the public this will sound great, and to you, well this will just be the cost of doing business.  What's more, you'll get to write off some of that fine as a loss, and even that number will be misleading.

If you are Citigroup, the decision is obvious: go crazy selling securities so risky that one of your traders states in an internal email that he "would not be surprised if half of these loans went down...I'm amazed they were closed at all." (okay, I guess you can be pretty obvious about your illegal actions).  That massive fine?  "Citigroup will pay $4.5 billion to settle federal and state civil claims related to the shoddy securities. The other $2.5 billion will underwrite loan modifications and principal reductions on mortgages—which the bank is required to do anyway—and finance some affordable rental housing construction."

At the end of the day, Citigroup remains incredibly profitable; the stock price keeps rising; and no one has been held criminally liable.

Going back to those two articles, all I can do is shake my head: the lawbreaking just goes on. So long as it's more profitable to break the law than to follow it--and while no one goes to jail--it'll keep happening, to the massive detriment to society.  Whether it's illegally foreclosing on homeowners; steering people of color into predatory mortgages; engaging in the practice of "redlining"; manipulating the LIBOR benchmark; or commiting financial fraud, the actions of the managers of big banks continue to damage the very fabric of our society--costing the taxpayers trillions of dollars, plunging households into poverty, wiping out the nest eggs of hardworking families, and leaving countless millions without jobs, hopes and futures.

No comments:

Post a Comment