The largest banks of Wall Street, the London City and other financial centers of the West have always been considered «Too Big to Fail». Such big-name banks were categorized as «untouchables», «sacred cows» which were destined to exist forever. And that is not surprising; the demise of any one of the «sacred cows» of the banking world could plunge not only one country, but the entire world into the depths of crisis. After all, the «sacred cows» existed outside of the so-called market economy, with its fierce competition, high risks, bankruptcies and defaults. They lived their lives in the oases of «banking socialism»… These «oases» always received the needed amount of life-giving moisture known as «cash liquidity» from the U.S. Federal Reserve system and from treasuries in the form of loans and investments. The principles of «banking socialism» were in full force during the last financial crisis, when the treasuries of the U.S., Great Britain, a number of Western European countries and Japan allocated a total of several trillion dollars to save the «sacred cows». In addition, the U.S. Federal Reserve system secretly gave over 16 trillion dollars in nearly interest-free loans to leading U.S. and Western European banks.
After the crisis, the leaders of the U.S. and other Western countries, under the pressure of public indignation, formally announced that «banking socialism» had come to an end and that the government would no longer rescue «sacred cows». Barack Obama announced his program for radically reforming the U.S. financial and banking system. He was even able to push the Dodd-Frank Act, also called the Wall Street Reform Act, through Congress. However, everything in the banking world gradually started to resume its normal course. The banks returned to financial speculation and again started accumulating «bad» assets, using client funds for risky transactions, paying top managers astronomical bonuses, manipulating financial statements, etc. All this gave rise to pessimism among political figures, public activists and common citizens. The smell of a new crisis was in the air. Or a second wave of the crisis, to be more precise.
«Raids» on Banks, or the Loss of Reverence for «Sacred Cows»
To be fair, one must admit that during the crisis there were exceptions to the principles of «banking socialism» with regard to several «sacred cows». Some of them were led to the slaughter after all. The largest such «cow» was the American bank Lehman Brothers, which was declared bankrupt. In the past two years there has been a marked increase in the number of «raids» on large banks on the part of financial regulators and other state agencies. This includes various actions of financial regulators in investigating the illegal activities of banks, lawsuits filed against banks by aggrieved investors and other clients, and demands from financial regulators for banks to pay fines and compensation to victims. Often the regulators propose that banks settle claims out of court. Sometimes this takes the form of collective agreements between the financial regulators and several banks. Usually in such a collective agreement the parties determine the total amount of fines, compensation and other claims. Then this amount is distributed over time and between banks.
The financial regulators of the U.S. and Great Britain have been the most active. Financial regulators in the U.S. consist of various organizations under the jurisdiction of the Department of the Treasury, the Department of Justice and the Federal Reserve System, as well as organizations independent of these departments. They specialize in various financial markets, various types of financial organizations, and various types of financial instruments. They include the Securities and Exchange Commission (SEC), the National Futures Association (NFA), the Commodity Futures Trading Commission (CFTC), the National Credit Union Administration (NCUA), etc. New regulators are appearing in the U.S. For example, at the height of the mortgage crisis in 2008 the Federal Housing Finance Agency (FHFA) was created. Until recently, in Great Britain there was only one financial regulator: the Financial Services Authority (FSA). Recently a reorganization began there, and the creation of several new regulators is planned.
Before the financial crisis of 2007-2009, U.S. banks paid fines in the millions, or at most in the tens of millions of dollars. In the end of the last century and the beginning of this century, the main objects of government investigations and prosecutions were arguably companies in the real sector of the economy. Most often the grounds for the charges were violations of ecological standards, safety regulations, health standards, etc. For example, in 1999 the U.S. government compelled General Motors to pay 4.9 billion dollars in fines and compensation for the fire-susceptible design of the gas tank in the Chevrolet Malibu (of course, the corporation's lawyers were later able to convince the judge to reduce the payments to 1.2 billion dollars).
The biggest «raid» on banks in the U.S. in the pre-crisis period took place in 2003. Regulators fined the banks for misleading clients who entrusted their funds to them for investment transactions (the banks' analytics departments overstated the prices of the stocks being purchased by the investment departments on behalf of the clients). Among the banks fined were such Wall Street giants as Goldman Sachs, Morgan Stanley and J.P. Morgan. A total of 1.4 billion dollars was paid, i.e. an average of 140 million dollars per bank.
It was no secret to anyone that American judges were traditionally very cautious about any lawsuits against large banks. They understood perfectly that a large bank is a special institution on which the prosperity not only of its employees and clients, but often of America as a whole depends. After all, a large fine could inadvertently cause a bank to go bankrupt, which in turn could spark a «domino effect» throughout the American financial and banking system. Thus judges would avoid considering cases against banks (especially large ones) whenever possible, and if they did consider them, they would consult with the relevant financial regulators. This kind of «telephone justice» was accepted as a norm of American life.
After the Financial Crisis
However, in the past two or three years financial regulators, district attorney's offices and U.S. courts have unexpectedly started showing an increased interest in banks, initiating investigations and handing down verdicts in a bold and principled manner. At first the main victims of these «raids» were for some reason non-American banks, mainly European and especially British. At the beginning of this decade the large European bank HSBC Holdings Plc., which has subsidiaries in the U.S., was accused of money laundering and collusion with drug cartels on the territory of Mexico. The bank's leadership tried to sweep the scandal under the rug and quickly admitted its guilt. It apologized to the U.S. Senate, and in early 2012 it paid a fine of 1.9 billion dollars. That summer in the U.S. a new series of investigations into the bank's activities began; it was accused of dubious transactions in various regions and countries, including the Cayman Islands, Iran, Saudi Arabia, Mexico and Syria.
In the same year a scandal started in the U.S. over some (almost all European) banks' manipulations of LIBOR rates (at the height of the financial crisis in autumn 2008 they understated these rates). This time the fines amounted to hundreds of millions of dollars per bank. In late 2012 the largest bank in Switzerland, UBS, was fined 1.5 billion dollars, 1.2 billion dollars of which was paid in the U.S. and the remainder in Great Britain, Switzerland and Japan. Giants of the London City were also among the banks fined, most notably Barclays.
Some experts and journalists believed that at the beginning of this decade U.S. financial regulators began conducting selective «raids», choosing European banks as their main targets. The idea was that American banks were fighting their competitors with the help of their financial regulators. However, this theory did not stand the test of time. The facts showed that Wall Street banks also made it onto the list of targets for prosecution. American banks were fined for many of their sins: money laundering, concealment of income from taxes in offshore zones, falsification of financial records, etc.
Payback for Discreditable Practices on the Mortgage Market
The biggest sin of U.S. banks was unscrupulous transactions on the mortgage market, which is what sparked the financial crisis. Banks gave mortgages, then «packaged» them and sold them as mortgage-backed securities which were traded on the securities market. Such manipulations are called the «securitization» of loans. The original mortgages were of extremely low quality, so the mortgage-backed securities were practically «junk bonds». They were purchased by the U.S. state mortgage agencies Fannie Mae and Freddie Mac, and then they ended up on the brink of bankruptcy and the government rescued the agencies using taxpayer money. Before the crisis was even over, a real commotion began in the country: banks started evicting hundreds of thousands of bank clients who had taken out mortgages from their homes. And many such clients, in turn, began filing lawsuits in American courts complaining of the unscrupulous behavior of the banks and demanding the return of their houses. The plaintiffs claimed that the banks did not pay due attention to details and often annulled mortgages wholesale using so-called robo-signing, that is, signing documents without verifying their content. Barack Obama charged various agencies with sorting out the situation which had taken shape, returning residences to conscientious clients when required, punishing unscrupulous bankers and creating funds for reparation of damages through fines imposed on banks. A key figure in making mortgage-related claims on the part of the government was the Federal Housing Finance Agency.
First on the black list of American banks was Bank of America. In June 2011 it paid 8.5 billion dollars as part of an agreement with regulators. But the story of Bank of America didn't end there. In autumn 2013 the FHFA stated its intention to fine the bank another 6 billion dollars. To be fair, it must be said that before 2008 Bank of America was not the main player on the mortgage market. However, at the very height of the crisis (in 2008) it bought Countrywide Financial, which was actively involved in the «repackaging» of mortgages and in the end found itself on the brink of bankruptcy. Thus, Bank of America acquired a company laden with hidden debts. The bank, accustomed to life as an «untouchable», was confident that it would find a way to «digest» the acquired company.
Financial regulators calculated that Bank of America and the acquired company Countrywide Financial sold mortgage securities to the U.S. agencies Fannie Mae and Freddie Mac for a record sum of 57 billion dollars. In second place is the American bank JPMorgan Chase (33 billion dollars), and in third place is the British bank Royal Bank of Scotland (30 billion dollars). There are a total of 17 American and European banks on the list of suspects. Among the American banks are practically all the leading banks of Wall Street. Among the European banks, besides the Royal Bank of Scotland, are the Swiss bank Credit Suisse and the British bank Barclays.
Approximately a year later, in summer 2012, five banks involved in mortgage schemes (Wells Fargo, JPMorgan Chase, Citigroup, Bank of America and Ally Financial) agreed to pay regulators 25 billion dollars as part of a pre-trial agreement. It is planned for 17 billion dollars out of that amount to go towards easing the payment terms on mortgage contracts for bank clients (in non-cash form, averaging up to 1,500-2,000 dollars per family). Another 5 billion dollars will be allocated to special state funds. From these funds victims will receive direct monetary compensation for losses resulting from eviction from their homes in the period from 2008 through 2011 (upon presentation of documents proving that the eviction took place in violation of the terms of the loan agreements).
The U.S. government reached the most recent large collective agreement in March 2013. The agreement encompasses 13 large banks, which agreed to pay a total of 9.3 billion dollars in compensations into a special fund. Among the American banks, first place for the size of its contribution to the fund once again went to Bank of America. Next came such Wall Street residents as Wells Fargo, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.
(To be continued)