Editor's Note: Yesterday Shah showed you the easiest way to make a fortune in the markets, as long as you're willing to break one of Wall Street's golden rules. Today, here's another reason Shah's so willing…
Headline news about banks settling charges for violating rules, regulations, and laws – and announcements of the fines they agree to pay – appears every day…
Rarely – if ever – do they reveal how much money is really being paid or where it's going…
They also seldom explain what kinds of settlements are reached…
Or how banks negotiate what they'll actually pay and to whom… or how they negotiate tax deductibility of fines… or how they get "credits" for fines they never pay… or how insurance covers some of it…
This is not one of those stories… this is about what really happens behind the banksters' doors.
The details are shocking…
These Massive Penalties Are Quieted to Protect "Us"
First of all, some settlements never see the light of day. They can be deemed "confidential" by regulators settling with a miscreant bank.
Why are some settlements confidential? Because bank lawyers argue their clients are exposed to "reputational risk" and details of their "alleged" wrongdoing, which they typically "neither admit nor deny," could impact the health of the bank. Of course, that could create "systemic risk," they argue, due to the damage to the public's perception of trust in their banking institutions.
The FDIC, the Federal Deposit Insurance Corporation, is one agency that thinks keeping settlements confidential will keep folks from withdrawing money from law-breaking banks. They believe it protects the agency from having to bail out remaining depositors if those banks eventually fail.
Last year, for example, the FDIC, ignoring the Federal Deposit Insurance Corp. Improvement Act of 1991 that mandates settlements be made public, fined Deutsche Bank $54 million for packaging and selling bad mortgage-backed securities to a failed bank, but no one heard about it.
According to E. Scott Reckard, who reported on the confidential settlement for the Los Angeles Times, "The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank's lawyers to keep it quiet: a 'no press release' clause that required the FDIC never to mention the deal 'except in response to a specific inquiry.'"
Also last year, according to the Financial Times, Wells Fargo "quietly settled" with the Federal Housing Finance Agency "for allegedly misleading disclosures on mortgage securities" it sold to Fannie Mae and Freddie Mac. The FT went on to say, "unlike deals with UBS and JPMorgan, Wells' settlement, which is believed to be worth less than $1 billion, is governed by a confidentiality agreement."
The Real Reason No One Goes to Jail
Of course, whether their settlements are confidential or not, too-big-to-fail banks have only faced civil charges, for which they have to pay fines. There have been no criminal prosecutions of any banks or banksters. That's because of the doctrine: too-big-to-fail and too-big-to-jail.
None of the agencies that bring civil actions against the big banks can pursue them criminally. If a bank's actions are so egregious that they warrant a criminal investigation, the agency passes along their files to the Department of Justice.
But, the DOJ hasn't pursued any criminal action against any bank or bankster.
Why? Because as Lanny Breuer, who was chief of the Criminal Division of the DOJ from April 2009 to March 2013, explained in a 2012 speech to the New York City Bar Association, "To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects."
Lanny Breuer left the DOJ last year to return, for a reported $4 million a year, to his old white-collar criminal defense firm Covington & Burling, who represents Morgan Stanley, Bank of America, and others. Attorney General Eric Holder is also a Covington alumni.
Besides not being pursued criminally, when banks and banksters are caught breaking laws they are slapped on the wrist and gifted with Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs). These consistently handed out agreements, in the 20 years since their emergence as an alternative to indictments, are, in the words of the Harvard Law School, "a mainstay of the U.S. corporate enforcement regime, with the U.S. Department of Justice (DOJ) leading the way."
According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, "These types of agreements have achieved official acceptance as a middle ground between exclusively civil enforcement (or even no enforcement action at all) and a criminal conviction and sentence. DPAs and NPAs allow companies and prosecutors to resolve high-stakes claims of corporate misconduct – often the subject of sizable media attention – through agreements to obey the law, cooperate comprehensively with the government, adopt or enhance rigorous compliance measures, and often pay a hefty monetary penalty."
You'll Be Surprised Where the Fine Money Lands
So, how does the DOJ and how do attorneys general, and the SEC and CFTC, and the FHFA and FREC and any and all of the other alphabet soup of regulators overseeing the Lords of the Banking Underworld determine what settlement fines banks have to pay?
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.