Why Don't Banks Face Criminal Charges Instead Of Civil Fines?
Nick Sorrentino makes good points at AgainstCronyCapitalism in reviewing John A. Allison's The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope
Allison ... explains (about the FDIC) that many start-up banks, funded initially by friends and family of bankers, which then often offer relatively generous rates on certificates of deposit, would never happen (along with the failure of these highly leveraged banks on occasion) if it were not for the FDIC. Allison argues that no one would put their money in a highly leveraged startup bank without the backstop of the FDIC.Some would argue that this is a good thing. That it spurs the growth of smaller banks.
But Allison argues, and I agree with him, that the FDIC encourages recklessness by some banks, which then encourages even banks which would prefer to business in a conservative manor to go further out in terms of yield on cds and loan underwriting. This increases instability in the entire system.
Add in things like the Community Reinvestment Act, and the Patriot Act, Sarbanes Oxley, and now Dodd-Frank, and one has a bouillabaisse of bad banking practices codified by law.
Yet, for all this oversight, for all this regulation, the banks which act badly (and more importantly the leadership of these banks) just continue on. They pay civil fines when they are caught. But God forbid any bankers go to jail.
A good case in point is Wells Fargo. The government argues that Wells committed widespread FHA Insurance fraud in the early to mid 2000s. But guess what? No one is going to go to jail. After millions of dollars stolen from the US taxpayer Wells Fargo will pay a fine. A speeding ticket. The cost of doing business.
Now a guy who holds up a liquor store for $100 might go away for life, but $100 million? Fuggetaboutit. We're all on the same side right? The feds will wrap some C-suite knuckles and life will go on. The leadership won't even have to pay anything out of pocket, the banks have insurance for that.
Wells Fargo will not pay the fine. The executives responsible will not pay the fine. The shareholders will not pay the fine.
The depositors and 'customers' will pay the fine in lowered interest rates on deposits and higher interest rates on credit.
But if you or I stole a couple hundred million...
DrCos at October 13, 2012 4:04 AM
Too big to jail.
Walter Moore at October 13, 2012 9:55 AM
George Will just wrote a great essay on the case for breaking up big banks, rather than subsidizing them. Here's the url:
http://www.washingtonpost.com/opinions/george-will-too-big-to-maintain/2012/10/12/9f8f8e94-1497-11e2-be82-c3411b7680a9_story.html
Walter Moore at October 13, 2012 9:58 AM
The FDIC may or may not promote reckless behavior on the part of banks, personally I think there are much larger perverse incentives in banking, but deposit insurance is extremely effective in stopping bank runs.
No bank ever has enough cash on hand to pay out all of its depositors because traditionally banks made their money through making loans with the funds deposited in the bank. During the Great Depression, when the public started to lose confidence in the viability of a bank, everyone would line up outside and demand their money back. Of course the bank couldn't pay out and it would collapse. Before the FDIC was created, the only thing the government could do to stop bank collapse was to declare bank holidays when no one could withdraw any funds. Since this was before credit cards and ATMs were invented, you can imagine that this caused real hardship to individuals and the overall economy.
Today, the systemic risk to bank failure is more from national-scale economic collapse. We are seeing large numbers of depositors in wobbly economies like Greece and Spain move their money (still in Euros) to banks in Germany. While there is no queue of angry customers outside the bank (at least not at first) it can still cause rapid bank failures. Unfortunately, deposit insurance doesn't protect well in this scenario.
The other limitation of deposit insurance is that it cannot protect against systemic failure in banking. The insurance after all is a guarantee that a trust fund paid into by the banks will bail out depositors in any member bank that fails. If too many of them fail, the pot will be exhausted. In theory the taxpayers are the backstop for the FDIC and in Ireland and several other Eurozone countries taxpayers have already been tapped to bail out the banks. Predictably, when the bailout values are too high, the taxes required to pay for the bailouts only futher damage an already weak economy.
Factual Interjection at October 15, 2012 8:36 AM
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