Throughout the media the figure of $17 billion has been paraded out as the penalty Bank of America will pay for its crimes in the mortgage security market that led to the 2008 financial crisis and resulting Great Recession. But will BofA really be paying that much? If the other deals struck for the same crisis causing activity are any indication, no.
Citigroup and JP Morgan Chase have both reached billion dollar settlements regarding the crimes they committed in the mortgage security market leading up to the meltdown but what they actually paid out was considerably less than the listed cost thanks to the tax system.
The settlement Bank of America agreed to requires cash payments to the Department of Justice, six states, and other agencies such as the Federal Housing Administration and Fannie Mae totaling $9.65 billion. The remaining $7 billion is supposed to be used to help homeowners still dealing with the consequences of Wall Street’s mortgage market meltdown, but for tax purposes those payments are not such a bad deal for BofA.
Banks earn a multiple of each dollar spent on some types of relief. Under Citi’s deal, for example, each dollar spent on legal aid counselors is worth US $2 in credits, and paper losses on some affordable housing project loans can be credited at as much as four times their actual value…
In discussing the deals with analysts, the banks “always say, ’just remember, there’s the piece that’s cash and the piece that’s not cash.’ In general terms, they’re suggesting that the relief is stuff they’re doing anyway.” Beyond the bonus credits, the lengthy durations of the deals mean banks can accrue some of the credits they need simply by running business as usual.
So as much as this is a legal settlement it is an opportunity to clear the books under favorable tax circumstances. Combine that with TARP and the Federal Reserve’s program to buy bad mortgage securities and it’s no surprise Wall Street has had one hell of a recovery. And hey, no jail time for anyone.
If a fundamental principle of law enforcement is deterrence then these settlements with the megabanks leave much to be desired. Wall Street has received no criminal punishment for financially destroying middle class and low income homeowners and knocking the US economy off its axis. The only person who really has been punished recently for financial fraud is Bernie Madoff. He made a big mistake, he stole from rich people.
Photo by Alex Proimos under Creative Commons license.