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?
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:
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):
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.
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:
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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.