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Why bank settlements are not enough

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Joined: 07 Mar 1999
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PostPosted: Mon Sep 01, 2014 12:47 pm    Post subject: Why bank settlements are not enough Reply with quote

Very interesting read by William Cohan, former investment banker, on the big settlement with J.P Morgan. It can be found here:

While both parties have taken lots of money from Wall Street, and the Republicans have resisted re-regulation completely, the story behind the big settlements is more nuanced, and interesting.

First, prosecutors, in the US Attorney General's office and at various state AG's offices, uncovered evidence that JP Morgan had not merely bought--at the governments urging, Bear Stearns and Washington Mutual, but they had also undertaken similar activities. They had bought low-quality mortgages, which had a high likelihood of default, and bundled them into securities, hiding the ratings that they were extremely low quality loans.

A number of heroes emerge who resisted a stampede to settlement; Kamala Harris in California, Eric Schneiderman in New York, and Benjamin Wagner, US Attorney in California who developed the civil complaint.

In my mind, the story is about attorney's and how they perceive incentives and disincentives. It is a fundamentally different story than Bard's perception that both parties pander to the oligopoly overlords. The settlement was for $13 billion, the largest settlement of all time. From the perspective of attorney's who work on civil cases, it becomes the pinnacle of one's career, and in their mind establishes a significant disincentive for such bad behavior.

Critics, including vociferously the Rolling Stone (Matt Taibbi, and the Nation disagree.

Some of the attractiveness of the settlement evaporates on closer examination. A significant part of it becomes tax deductible expenditures, so the taxpayer covers part of the cost. The lack of criminal charges leaves the responsible bankers free, not even having suffered the perp walk of the Texas governor. The details of the settlement do not assure that the money goes to those who were defrauded by the sale of mis-represented securities. And for JP Morgan, the settlement is a pittance compared to the $2.4 trillion in assets that they had.

Holder comes off reasonably well in the article--but the problem that he identified with too big to fail, or prosecute, banks remains. Both parties felt in 2008 that letting the banks fail was unacceptable, and I agree--along with the majority of Congress who enacted the TARP legislation. But Obama and Holder's instincts to move on, and the Republican's instincts to fight the Dodd Frank Act and regulations, are wrong.

Are memories too short, will the recovery make the bail out more palatable, or will the lack of prosecution of wrong-doers become an election issue in 2016?

In any event, a more substantial crime than stealing a box of cigars. But if you steal with a pen...
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