Points of View
Rossoff & Company’s Points of View is a forum for industry experts, leading finance professionals and senior Rossoff & Co. professionals to provide insights and commentary on current news stories, financial market themes and industry dynamics.
WASHINGTON AND WALL STREET - A BROMANCE
Two seemingly unrelated news stories, publicized in the last couple of weeks, have highlighted the symbiotic relationship between our government and our major banks. In one, it was reported that whistle blowers were paid a total of $170 million for aiding in the recovery of $16.65 billion from Bank of America in a settlement announced last August in connection with offenses related to pre-2008 mortgage financings. The Bank of America recovery figure is roughly equal to the earnings of all six major banks in the third quarter of 2014 and reminds us of the bounty collected by the US Treasury – and many States – from Wall Street over the last several years ($36.65 billion has been collected from the six major banks to date in mortgage-related settlements). In the second story, we are regaled with details of how a clause injected into the recent $1.1 trillion budget bill passed by Congress, and signed by the President, will allow all the major Wall Street banks to continue to conduct certain derivative operations in their federally-insured banking subsidiaries. This provision reverses a requirement of the Dodd-Frank Act and ensures that embedded financing costs related to derivative activity will remain low for the banks (you will charge the banks less if the Feds are standing behind such commitments) and profits on such activities will remain high. Thus the reciprocity – the Feds take with one hand and give back with the other.
The details in the two cases are instructive. The whistleblowers in the Bank of America case received the largest whistleblower award ever recorded, in connection with the largest bank settlement ever agreed. The violations alleged against Bank of America were all related to activities by the Bank’s Countrywide subsidiary, a mortgage bank that Bank of America acquired in July of 2008, with the approval and encouragement of the Bank’s federal regulators. Since the acquisition closed, Bank of America has agreed to settlements on five occasions and has paid out or lost more than $50 billion. And there’s nothing to ensure that more claims and settlements won’t be coming in the future. Interestingly, no Countrywide or Bank of America executives have been prosecuted in connection with the admitted fraud. It’s likely that the cases were not strong enough to bring a criminal action against individuals and yet the government was able to strong-arm the banks into paying gigantic settlements. Such actions by the government are discretionary and opportunistic. In addition, the repetitive nature of the government claims creates an impression that such penalties are simply a cost of doing business – a point that has been made by many observers. There’s no doubt that Countrywide employed slipshod and even fraudulent methods on a routine basis, but should Bank of America be made to pay, again and again? Or is the Bank, which was lauded for saving Countrywide from bankruptcy in 2008, now just a piñata to be cracked open by the government and exploited for goodies?
The details of the second story demonstrate that our elected representatives can be even-handed: they may take from the big banks, but they are also prepared to give. In a rare display of bi-partisan legislative cooperation, the House and the Senate, with votes from Republicans and Democrats, passed a $1.1 trillion spending bill that will keep the government in operation through September of 2015. Of course, a number of unrelated measures were added to the bill, one of which, introduced at the last minute, designed to give the big banks relief from a Dodd-Frank measure that restrains derivatives transactions. The rider was sponsored by two Democrats and two Republicans and written by Citicorp’s lobbyists. It has been widely reported that Jamie Dimon himself, CEO of JP Morgan, lobbied Senators and Congressmen personally for this measure. Our major banks want to be able to continue to sell debt, currency and credit derivatives in their federally-insured subsidiaries because these are highly profitable products for them. And our Senators and Congressmen are happy to go along – they need the geese to keep laying golden eggs for the government to harvest. Advocates of the measure claimed that the Banks needed the regulatory change so that they could keep selling hedges to our farmers and factory owners, but nobody really believes this. Legitimate hedging options are available elsewhere. In any case, why should we, the taxpayers who ultimately stand behind the Banks’ insured subsidiaries, be subsidizing these hedging activities?
As if the Dodd-Frank derivative relief was not enough, shortly after the budget bill was passed the Federal Reserve announced that the major Banks would be given another two years to dispose of their Private Equity and Hedge fund activities, also as required by Dodd-Frank. The Banks now have until 2017 to abide by the so-called Volcker Rule, but it’s more likely this rule will never be enforced. Another benefit for the Banks. To put the cherry on top, Janet Yellen recently stated before Congress that interest rates would stay at their current abnormally low levels for an extended period of time, which is the current policy, and that the Fed would be “patient” with respect to raising rates. When Wall Street heard the word “patient” – and the Street was expecting something more like the opposite – traders threw a year-end party and sent the major averages up over 5% in the next several days. Life is good!
Who doesn’t like a good Buddy Movie? This one has been playing for years. Expect the goodies to keep flowing both ways as the presidential election season heats up. Hillary Clinton, our All American Girl, will be trolling up and down Park Avenue and Central Park West, collecting campaign contributions from our financial elite. Republicans will be doing the same. Only Elizabeth Warren will be calling them out – more about her in a future blog.