When it comes to big banks' bad behavior and the fines they pay to settle "allegations" - which are actually civil charges and which would be criminal charges if applied to any other business or in any parallel universe - things aren't even close to what they seem.
Sure the headlines scream victory, at least monetary victory, for some ripped-off consumers, some hard-charging regulators, and our vaunted (NOT) Justice Department.
We think we hear the ching-ching of the Treasury Department's cash registers ringing as they collect billions of dollars from miscreant, monster banks.
We think we can hear victorious regulators popping champagne corks as they celebrate settlement money coming in to prop up their budgets so they can keep going after these lawbreakers.
We think we can hear the cling-clank of consumers - who've been set up like bowling pins to be knocked down until the change falls out of their pockets at the feet of slobbering banksters - getting some of their stolen money back.
If that is what you think you hear, you're tone deaf.
Here's what's really going on...
The headlines, like the ones that screamed JPMorgan Chase & Co. (NYSE: JPM) was paying a record $13 billion to settle misdeeds that may have accidentally contributed to the credit crisis and the Great Recession that maybe forever imposed on America's middle class and perennial underclass a new set of dream shackles, are BS. And I don't mean back-stabbing.
Ripped-off consumers don't get made whole. Regulators don't keep a dime of what they extract. Only the U.S. Treasury rings its register on any regular basis... and you thought the deficit was declining on its own!
And the big banks? Not only aren't they paying what the headlines trumpet, most of what they do pay, and far more disgustingly, a lot of what they say they are going to pay in restitution to consumers, they write off on their taxes!
That's right, after they neither admit nor deny doing what they did, and settle on paying fines and other forms of remunerative compensation to prove they didn't do anything wrong, they write most of those "expenses" off.
Of course those write-offs reduce their taxable income. So the public's screwed again.
You didn't know that? If not, don't beat yourself up. Not a lot of people do.
But Congress does.
Some people in Congress actually want to do something about the games banks play with the settlements they negotiate with regulators, attorneys general, and the Justice Department.
But, of course, Congress being Congress, none of these "bills" have moved an inch.
Back on Oct. 30, 2013, after JPM's $13 billion settlement made headlines, House Democrats Peter Welch (VT) and Luis Gutierrez (IL) introduced the "Stop Deducting Damages Act of 2013."
The bill as intended:
...amends the Internal Revenue Code to: (1) deny a tax deduction for any amount paid or incurred for compensatory or punitive damages in connection with any judgment in, or settlement of, any action against a government; and (2) include in gross income any amount paid as insurance or otherwise due to liability for punitive damages.
Then on Nov. 5, 2013, Senators Jack Reed (D-RI) and Charles E. Grassley (R-Iowa) put forward their "Government Settlement Transparency and Reform Act."
The bill as intended:
...amends the Internal Revenue Code to expand provisions relating to the non-deductibility of fines and penalties, to prohibit a tax deduction for any amount paid or incurred to any governmental entity relating to the violation of any law or the investigation or inquiry into a potential violation of law. Exempts from such prohibition: (1) restitution or amounts paid to come into compliance with any law that was violated or otherwise involved in the investigation or inquiry, (2) amounts paid pursuant to a court order in a suit in which the governmental entity was not a party, and (3) amounts paid or incurred as taxes due. Imposes new reporting requirements on governmental entities relating to amounts paid as fines or for restitution.
But neither of those "bills" came due.
Then on Jan. 8, 2014, Senators Elizabeth Warren (D-MA) and Tom Coburn (R-OK) introduced to the Senate their "Truth in Settlements Act of 2014."
Senator Warren explained the bill:
When government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public. Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement. Increased transparency will shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.
Meanwhile, Senator Warren's website tells us:
Under the Truth in Settlements Act, all written public statements that reference the dollar amounts of settlements will be required to include explanations of how those settlements are categorized for tax purposes and whether payments may be offset by "credits" for particular conduct. Companies that settle with enforcement agencies will be required to disclose in their Securities and Exchange Commission (SEC) filings whether they have deducted any or all of the dollar amounts of their settlements from their taxes; and federal agencies will be required to post basic information about settlements and provide copies of those agreements on their websites. To address concerns about confidentiality, the Truth in Settlements Act also requires agencies to explain publicly why confidentiality is justified in any particular instance. The Act also directs agencies to disclose basic information about the number of settlements they deem confidential each year and directs the Government Accountability Office (GAO) to conduct a study of confidentiality procedures and to provide additional recommendations for increasing transparency. These and other provisions of the Truth in Settlements Act will increase the transparency of government settlements and permit greater public scrutiny.
Where are these bills?
They were all DOA, as in dead on arrival.
Don't bother looking to see if they've made any progress. I'll tell you now, if any of them ever happen it will probably be in February, because it will be a cold day in hell before any of the big banks' profits are meaningfully haircut by any "law."
You want to know more about how settlements work, how banks negotiate them, how headlines about big fines are misleading? Read Part III of my series on settlements in Money Morning.
But read it on an empty stomach, otherwise you might get sick.
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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.
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Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.