Inside the Bankster Settlements: Where All the Money Is Going

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Everyone wants to know where the billions of dollars big banks have forked over to bank regulators, the SEC, the CFTC, the FERC, and the Department of Justice ends up.

But, before I can tell you who's paid out what, the infractions they committed, and where that money ends up, I want to give you information that's critical in assessing your bank and your investments...

Just who is it that's looking out for your money?

These Agencies "Restrict" the Big Banks

Banks are watched over all the time. And with good reason. The entire financial system, in the U.S. and globally, is predicated on trusting banks.

First and foremost, banks are for-profit entities.

To assume giant banks won't put their own massive profitability ahead of depositors, borrowers, customers, and clients flies in the face of what America's (and European) "too-big-to-fail" and "too-big-to-jail" behemoths have done.

The Federal Reserve System, which houses the Federal Reserve Bank, isn't just America's central bank; the Federal Reserve is also the top bank regulator in the United States. The Federal Reserve is responsible for supervising and regulating:

  • Bank holding companies, including, under the Gramm-Leach-Blilely Act of 1999, diversified financial holding companies
  • State chartered banks that are members of the Federal Reserve System
  • Foreign branches of member banks
  • Edge and agreement corporations, through which U.S. banks conduct foreign operations
  • U.S. banks conducting foreign operations
  • U.S. state-licensed branches, agencies, and representative offices of foreign banks
  • Non-banking activities of foreign banks
  • State banking authorities also regulate state-chartered banks.

The Office of Comptroller of the Currency (OCC), which absorbed the Office of Thrift Supervision (OTS) in July 2011, regulates national banks, who are not members of the Federal Reserve System, and federal savings and loan associations.

The National Credit Union Administration (NCUA) supervises, regulates, and insures federal credit unions and state-chartered credit unions.

The Federal Deposit Insurance Corporation (FDIC) insures state-chartered banks that are not members of the Federal Reserve System and insures deposits in banks and savings associations in the event of bank failure.

The Securities and Exchange Commission (SEC) administers and enforces federal securities laws. Because big banks are corporations or subsidiaries of bank holding companies and because they engage in trading securities regulated by the SEC, they are subject to regulation by the SEC.

The SEC is also charged with administering and enforcing the Public Company Accounting Reform and Investor Protection Act of 2002, otherwise known as Sarbanes-Oxley. Sarbox, as it is often called, mandates that CEOs and CFOs of public companies "certify" their quarterly and annual financial statements for "accuracy and completeness."

The Commodity Futures Trading Commission (CFTC) doesn't directly regulate banks, but regulates futures trading, options on commodity futures, foreign exchange trading, and now swaps and some derivatives.

In its regulatory capacity to administer and enforce trading rules and commodity exchanges, as the SEC regulates listed corporations, equity securities, and the exchanges they are traded on, the CFTC is another regulator banks are beholden to.

Banks are also regulated by the Federal Energy Regulatory Commission (FERC) if they own or transact in any way in the physical natural gas market, the electric or other power generation markets, or are involved in storage, transmission, operation, or related transactions in anything the FERC regulates.

Last, but by no means least, the Dodd-Frank Wall Street Reform and Consumer Protection Act spawned five new regulatory bodies, three of which are bank oversight agencies (click on each to read what they cover):

The G-Men Use This Toolbox for Building Their Case

U.S. regulators typically employ the same set of tools in their bank monitoring efforts. At the lowest level of concern, regulators indicate problem areas requiring management's attention, which usually result from routine examinations.

If problems are more disturbing to examiners, the regulator will prepare a separate document in the form of either an informal or formal agreement. A formal action is backed by the force of law. A bank failing to comply with an informal agreement is subjected to a formal agreement, and if it doesn't comply with that, it can be subject to civil monetary penalties (CMPs) or other administrative or legal action.

  • Bank examination findings. These are confidential findings that are not disclosed externally.
  • Conditions or commitments in regulatory approval orders. As a part of the normal regulatory approval process required for a wide variety of acquisitions or new activities, a regulator may condition the approval upon certain limitations or restrictions on related or future activity. These restrictions may be agreed to by the bank in the form of a commitment, or imposed by the regulator as a condition.
  • Informal actions. The bank decides if these are disclosed to the public. They come in several varieties:
    • Supervisory letter, commitment letter, or board resolution. Generally used when the problems do not pose a serious threat to the bank and when the regulator expects the bank to comply fully.

    • Memorandum of understanding (MOU). Somewhat more formal than letters or resolution, but still not administratively or judicially enforceable.

    • Safety and soundness plan. Requires the bank to produce and implement a plan to comply with safety and soundness guidelines, which include issues such as internal controls, internal audits, loan documentation, underwriting standards, interest rate exposure, compensation, and asset growth.
  • Formal actions. These are required to be made public by the regulatory body.
    • Safety and soundness order/directive. When a bank fails to submit or implement a safety and soundness plan, the regulator can issue an order or directive to require compliance.

    • Prompt corrective action directive. This imposes restrictions on banks failing to maintain adequate capital.

    • Capital directive. This allows the regulator to set higher capital requirements that are generally expected of the bank.

    • Written or formal agreement. These agreements are used by regulators to remediate violations of the law or unsafe or unsound practices. The agreement requires a bank to cease certain practices and to take affirmative actions to correct practices. However, unlike an MOU, the agreement is made public and the regulator can assess civil monetary penalties (CMPs) for violations of the agreement. Such an agreement can be issued in combination with a consent order (see below).

    • Consent order. These orders are used by regulators to remediate violations of the law or unsafe or unsound practices. The order requires a bank to cease certain practices and to take affirmative actions to correct practices. Such orders are used when the regulator is not confident that management will take the necessary steps voluntarily and/or where the problems are so severe that a lesser action is not justified. As their name suggests, these orders are issued with the bank's consent. Failure to comply with the order can lead to CMPs against the bank or specific individuals and, in the extreme, the regulator can seek an injunction against the bank requiring compliance.

    • Cease and desist order. These are effectively identical to consent orders in terms of potential scope and effect. However, these orders are typically issued to a bank without its consent if the regulator takes the necessary administrative steps.
  • Other actions. These are sometimes taken in conjunction with one of the above, not alone.
    • Civil money penalties. Regulators can and do issue a CMP on a bank. More often, however, the penalty is directed at specific individuals.

    • Removal/prohibition. In addition to CMPs, regulators can take actions against individuals, including a formal agreement (to take actions), a cease and desist order or prohibition action (to cease an action), or removal from office (for serious misconduct).

    How Much Will the Banksters Pay Up?

    When it comes to CMPs, the FDIC states, "Civil money penalties are assessed not only to punish the violator according to the degree of culpability and severity of the violation, but also to deter future violations."

    Although relevant to the FDIC's interests, the primary purpose for utilizing civil money penalties is not to effect remedial action.

    In 1998, the FDIC adopted a revised interagency statement of policy regarding the assessment of civil money penalties. To facilitate evaluation of the gravity of such violation(s), the policy statement sets forth the following factors that must be considered in determining whether civil money penalties should be imposed:

    • Evidence that the violation or practice or breach of fiduciary duty was intentional or was committed with a disregard of the law or with a disregard of the consequences to the institution;

    • The duration and frequency of the violations, practices, or breaches of fiduciary duty;

    • The continuation of the violations, practices, or breach of fiduciary duty after the respondent was notified or, alternatively, its immediate cessation and correction;

    • The failure to cooperate with the agency in effecting early resolution of the problem;

    • Evidence of concealment of the violation, practice, or breach of fiduciary duty or, alternatively, voluntary disclosure of the violation, practice, or breach of fiduciary duty;

    • Any threat of loss, actual loss, or other harm to the institution, including harm to the public confidence in the institution, and the degree of such harm;

    • Evidence that a participant or his or her associates received financial gain or other benefit as a result of the violation, practice, or breach of fiduciary duty.

    Regulators who all have investigative and subpoena power, but can only charge banks or individuals with civil violations mandating CMPs, suspension, revocation of licenses, and call for disgorgement of ill-begotten gains, find criminal behavior, they contact the Department of Justice.

    Ultimately, all the regulators work together with the DOJ, the FBI, and other agencies capable of pursuing criminal activity to bring miscreant TBTF banks to justice.

    Next week, we'll see if "justice" is paid when the fines hit the banksters’ pocketbooks...

    About the Author

    Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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