Will the $17B Bank of America penalty deter individuals from breaking the law?

Bank of America will pay nearly $17 billion for its role in writing and securitizing risky home loans in the run up the housing crisis. For a closer look at the Justice Department deal, and the impact it and earlier bank settlements might have on Wall Street and across the U.S., Hari Sreenivasan talks to Dennis Kelleher of Better Markets and Lynn Stout of Cornell University.

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    The U.S. Justice Department today announced that it had settled its investigation into Bank of America with a record-breaking financial penalty.

    Hari Sreenivasan has the story.


    Under the terms of the deal, Bank of America will pay a total of nearly $17 billion for its role in writing and securitizing risky home loans in the run-up to the housing crisis. Many of those loans eventually failed.

    Almost $10 billion of that figure will go to the U.S. Treasury, $6 billion to the states and other government agencies; $7 billion is earmarked to aid struggling consumers, particularly distressed homeowners.

    At a press conference this morning, U.S. Associate Attorney General Tony West said that was an important part of the deal.

    For a closer look at today's deal and what impact it and other earlier bank settlements might have both on Wall Street and on Main Street, I am joined by Lynn Stout, professor of corporate and business law at Cornell Law School, and Dennis Kelleher, president and CEO of BetterMarkets.com, a nonpartisan, nonprofit organization that promotes the public interest in financial markets.

    We invited Bank of America and the major banking industry trade groups to join us. They all declined our requests.

    So, Lynn Stout, let me start with you. How big of a deal is this?

  • LYNN STOUT, Cornell University:

    I think this really is a big deal, and it's overdue.

    I think we should all be glad to see it; $17 billion is real money, even to a bank. It amounts to about 10 percent of the value of all Bank of America stock and a year of two of their profits, so this should really get the bank's attention.


    Dennis Kelleher, is it big enough?

  • DENNIS KELLEHER, Better Markets:

    Well, it's not $17 billion. First of all, they are going to get a $4 billion tax deduction, so essentially the American taxpayers are going to be subsidizing the settlement, so that takes 17 down to 13.

    Of the $7 billion of so-called soft money in homeowner relief, that really will never amount to more than 50 cents on the dollar, so you cut off another $3 billion or so there. In fact, if you really want to know how incredibly tough this is, the biggest mover on the financial stocks was Bank of America, which went up over 4 percent.

    So, when the stock goes up because they announced there's a settlement, that tells you how Wall Street perceives how tough or lack of toughness that this settlement really is.


    Lynn Stout, did the punishment not fit the crime? Was it too small?


    I think it's the best we could hope for, really.

    The reality is, I don't think there's any amount you could ask the banks to pay that would make up for the damage they have done to the economy. We have now had several settlements in the billions. The damage is measured in the trillions.

    Without shutting down the banking industry entirely, there's no way to make up for that damage. But compared to what's gone on in the past, where regulators have settled with banks for far smaller amounts that really were just a slap on the wrist, this is going to inflict some real pain. It will get the banks' attention.

    It will help to discourage this sort of unethical and even fraudulent behavior in the future. So I think that Eric Holder and Tony West deserve a pat on the back. It's hard to say that this isn't a lot better than what we have seen before.


    Well, the problem with that analysis is that, unfortunately, these settlements are carefully crafted more to conceal than to reveal.

    So, for example, it's impossible to say whether or not $17 billion is appropriate or not. After all, this is supposed to punish crime and deter future crime. And the only way to know whether or not this is a reasonable amount or should be lauded and patted on the back is to know, how much did the bank make from its years of systemic fraudulent conduct, or, conversely, Hari, how much did investors, customers and clients lose?

    So, for example, if the bank made $200 billion, $17 billion doesn't look very good. Or if investors and customers and clients lost $100 billion, $17 billion doesn't look very good. So they didn't provide any of the key information that anybody would need to actually evaluate the settlement.

    And most importantly, if you want to deter crime and law-breaking on Wall Street or anywhere else, then you ought to punish individuals. Banks do not commit crimes. Bankers do. And not a single banker was punished here, not one. They get to keep their bonuses, their positions, their promotions and everything else, and the bank gets to use shareholders' money to pay off and buy a get-out-of-jail-free card for them.


    Lynn Stout, what about that idea, that no individual has been held accountable?


    I think the reality is that we need to acknowledge that, actually, banks and institutions do commit crimes.

    The people inside Bank of America were driven by incentives and pay-for-performance schemes that are now widespread in the industry. We might as well call them pay-for-unethical-performance schemes in many situations.

    And, ironically, a lot of those incentive schemes were demanded by the shareholders of the banks themselves. So it doesn't trouble me to think that the shareholders are going to pay some of the settlement. They are responsible for some of the pay practices and the procedures that led to this problem in the first place.

    So the reality is, corporations are huge institutions. They influence the behavior of the people inside them. At some point, you have to focus on the institution, and not just on the individuals. The people in the banking industry who knew it was going on were for the most part at the very low levels. They were the mortgage brokers. They were the underwriters.

    It wasn't the CEOs and the top executives, many of whom found it quite easy to look the other way and not know what was going on. Criminal prosecution of individuals is very hard in these cases. The most effective strategy may be just what the Department of Justice is pursuing, which is to hit the corporate entity where the corporate entity hurts, and that is its wallet.


    Dean Kelleher?


    Well, unfortunately, I wish that were true.

    But no one has anywhere near enough information to actually know whether it is or not. And if you want to affect — which is to say, what did executives know and when did they know it, it is not credible to think that literally hundreds of people were involved for years in systemic fraudulent practices.

    And if you read what — I put in quotes — "the statement of facts" put out by the Department of Justice, they identify people by their titles, including the chairman of Countrywide sending e-mails in '06 clearly indicating a knowledge of fraudulent practices that were widespread at the time.

    And so you have to focus on individuals and hold individuals accountable, and I don't — I'm OK with using shareholder money for an institution to pay some of the fines. But if individuals get off scot-free — and they don't have to be criminally prosecuted, although they could be, but they're not even being held civilly liable.

    So if there's no downside for the individuals who are collecting bonuses, the banks are getting bailed out with taxpayer money, years later, some — a couple of billion dollars of shareholder dollars is thrown at to make it all go away, that actually rewards past crime and incentivizes future crime. You have to go after bankers, not just banks.


    Dean Kelleher, what about the fact that some of these bankers that were responsible for the fraudulent activity came from, say, Merrill Lynch or Countrywide, institutions that Bank of America purchased? Should Bank of America be held liable?


    As Lynn knows, it's standard corporate practice, and it has been for, I don't know, 100 years, that an acquirer acquires the assets and liabilities of an institution. And that's what happened in this case.

    It's routine and boring and happens all the time. They're trying to — they took the position or they tried to claim that they should get extra credit because they did it as a service to the country in the middle of the crisis. Well, that was factually false. And the Department of Justice rejected it, as they should have.

    They actually bought Countrywide in — closed it in early 2008, and they bought Merrill Lynch after trying to buy Merrill Lynch for years. So they took an advantage of an opportunity. They also got a tremendous upside from those acquisitions, notwithstanding the downside, largely due to Countrywide.

    So I think that that's a red herring that the bank's trying to distract people with.


    Lynn Stout, the door has been left open for criminal investigation, but what's the likelihood that that avenue is ever pursued?


    Well, that is going to depend on a lot of things that we're not privy to.

    I have to say, this Department of Justice seems to be somewhat serious about the issue, so I think we can all hope that they're going to do the in-depth investigation that Dennis is calling for. And, by the way, it's important to note, this settlement — this settlement doesn't preclude future criminal proceedings against the bank or against individuals.

    It's in addition to, not a substitute for criminal prosecutions. But whether we're going to be able to show that any top executives had the kind of deep knowledge that you need to show to get a criminal prosecution or a criminal conviction, that remains to be seen.


    I think criminal prosecution is a sideshow.

    The bar is so high and it's so difficult, particularly, as Lynn alluded to earlier, these senior executives get to pretend like they look the other way and there's no e-mails. But civil litigation and civil prosecution should be at the front and top of the list.


    All right, Dennis Kelleher, not Dean, thank you very much.

    And, Lynn Stout, thank you for joining us.


    Thanks, Hari.


    You're welcome, Hari.

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