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Bill to banks for past misdeeds reaches eye-watering proportions

Bill to banks for past misdeeds reaches eye-watering proportions Anthony Harrington

With J.P. Morgan setting aside $23 billion to cover legal fees and fines for charges against its activities leading up to the global financial crash - mainly relating to its sub-prime mortgage securitization business - the incentives being provided for future big bank management boards to get their act together just keep on growing. One can debate whether the cost of punitive actions has yet reached a sufficient level of severity - but it is undeniable that the scale of fines being imposed is heading in the right direction.

These are not pinpricks. Only recently, J.P. Morgan reached a tentative agreement with the US government to settle charges against it for the sum of $13 billion, and there is already talk that that deal could be unraveling. Diverting $23 billion away from profits, the potential shareholder dividend pool, and ultimately into to the coffers of government and other institutions seeking compensation for wrongdoing, is severe. To put the scale of this reserve allocation into context - it is almost exactly equivalent to the bank setting aside the whole of its revenues (not profits) for the third quarter of 2013, which amounted to $23.9 billion. Net income was only $5.8 billion and that, again, is income - not profit. In fact, there was no profit for J.P. Morgan in Q3 2013, because the bank declared a net loss of $400,000 dollars, despite the fact that client deposits amounted to $386 billion, up 10%, with assets under custody amounting to a record $19.7 trillion, up 11%.

The bank's loan balances stood at a record $90.5 billion. But, of course, assets under custody and client deposits are not the bank's money. What stung the bank in Q3 was the $9.15 billion pre-tax sum set aside for legal expenses in the bank's corporate division, "including reserves for litigation and regulatory proceedings".

What J.P. Morgan wants to do with its Q3 financial statement is to emphasize the role it plays in helping the US economy to grow. It ended the quarter with over 5,600 branches, 32.9 million active online customers and over 1,900 Chase Private Client locations, providing services to America's high net worth individuals. It also provided $442 billion of credit to US corporations and $14 billion of credit to US small businesses. Non-profit and government entities, which include states, municipalities, hospitals and universities, got $59 billion of credit from J.P. Morgan through the quarter.

This, as the bank rightly points out, is the engine that keeps America trucking. If only its senior executives had been able to hoe a straight row in the exuberant times leading up to the 2008 smash, this kind of record would be something to applaud. It still is - but, after the egregious crimes perpetrated by so many big banks, there is no will among the general public in advanced markets to celebrate the role played by the likes of J.P. Morgan in lubricating the wheels of commerce. Instead, there is a growing feeling that, while humongous fines on banks are good, prison for guilty bank executives would be so much better.

This is not just a sentiment whipped up by the tabloid press in search of some additional newspaper sales. The feeling that banks have been getting off with cash payments where working folk would get jail sentences has reached right to the heart of the regulatory machinery. David Wright, secretary general of the International Organization of Securities Commissions (Iosco) - the regulators charged with defining the procedures to deter financial institutions from committing similar market abuses in the future - is quoted in a recent Bloomberg article as saying  that executives in banks should face prison regardless of where they are based. There will be no safe havens for crooked bankers and insider traders under the global guidelines being planned by Iosco. Bloomberg quotes Wright as follows:

"We have simply had far too many examples over the last 10 years of totally unacceptable behavior in financial markets. The potential illicit financial gains for them outweigh the risks and costs of getting caught. This equation must be reversed [...] In my personal view those who blatantly break the rules and mis-sell and try to profit unfairly, there's only one place they should go and that's the nearest penitentiary."

Wright and his fellow regulators aim to close off the possibility for market abusers to locate themselves in countries with lax rules and weak penalties. "We want tough and sufficient sanctions everywhere. It's about closing loopholes," he comments.

It is a worthy thought, but experience to date shows that the world's regulators are generally to be found tracking several steps behind their extremely highly paid targets. Talk is easy - but getting a global set of standards enforced homogeneously across the globe is an extremely hard task, especially when markets really start to roar and the dollars come pouring in.

Further reading on re-regulation of the banking sector

Tags: 2008 crash , global financial crisis , International Organisation of Securities Commissions , Iosco , JP Morgan , regulation , sub-prime crisis
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