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Jake's View
PUBLISHED : Tuesday, 22 October, 2013, 1:22am
UPDATED : Tuesday, 22 October, 2013, 1:22am

Public suffers most from big bank fines

US failure to prosecute banks for alleged crimes, but instead impose large fines, punishes the general public while failing to serve justice

JP Morgan Chase's record US$13 billion deal to end US probes of its mortgage bond sales would free America's largest bank from mounting civil disputes with the government while leaving a criminal inquiry unresolved.

SCMP, October 21

Troubled publisher Conrad Black, mired in dubious American court proceedings, once famously railed against "frenzied prosecutors … and media tricoteuses, none of whom have any more interest in justice than a tomcat has in a marriage licence".

I think he has a point. Once again, a big question of law has been left unsettled in favour of a big sum of money, which the US Department of Justice will flaunt as a confession of criminal activity by a bank that has been convicted of nothing and may well be innocent of any crime. It is only the appearance of justice that these prosecutors want.

After endless legal harassment, the banks will give in and pay billions.

There was supposedly no waiver from criminal prosecution but we have this only from "a person familiar with the talks", which is weasel-speech for one of the prosecutors. They have been getting trouble from the media tricoteuses recently for never bringing a real prosecution and, as they always play up to the tricoteuses, this is their way of fending it off.

I consider it unlikely. The bank has undoubtedly ring-fenced its senior officers from prosecution as part of the deal. It is the only thing they get for their US$13 billion although, of course, a junior employee may yet be sacrificed after being dressed up, Inca fashion, to make it seem a real sacrifice.

And what will he have done to deserve this fate? In one of millions of e-mails through which the prosecutors have trawled, he will be found to have told someone else of these mortgage bonds, "Hey, Sunshine, this is hot stuff, know what I mean? Fill your boots."

Hideous crime, he spoke whereof he knew nothing, as most denizens of dealing desks do every day. But instead of treating him as just another loud-mouthed ignoramus, the prosecutors will take this one-in-a-million e-mail as proof that the bank's management deliberately instructed staff to defraud the general public.

Do they have it written anywhere? Have they found a management signature on such an instruction? Do they have a credible witness to testify that management said this?

No, they do not and so their fraud case against management is immediately a weak one. Best in that case resort to threatening the bank's reputation and the lives of its senior personnel with endless legal harassment. They will give in and pay billions. They always do.

The big irony here is that the same US government now prosecuting banks for selling duff mortgage bonds is the one that created these bonds by irresponsible mortgage lending through federal agencies.

And just who will carry the burden of this US$13 billion settlement?

Not the bank's executives. They will take a one or two-year bonus cut but this will amount to millions, not billions.

Not the bank's employees. If their pay is chopped, the headhunters will come calling and they will just move on.

It is the general public who will pay. They will pay first of all in lower bank profits and a lower share price. These big banks are effectively owned by hundreds of millions of people through big mutual and pension funds. It is America's retirement savings that will be hit.

They will also pay in other ways. Bank regulatory authorities everywhere are pushing banks to show higher ratios of capital to assets as a safety precaution. Take away the capital with multibillion-dollar stings and you restrict the bank's ability to grow its assets.

This in turn means that monetary authorities must, for a longer period, maintain low interest rates through lax monetary policies in order to stimulate economic growth.

The translation of all this for your purposes is that you must continue yet longer to endure deposit interest rates that are lower than inflation. These chest-beating demonstrations from the US Department of Justice are one of the reasons that you get so little return on your investments these days. It is you who pay for the vanity of American prosecutors.

Thus, I think I must disagree with Conrad Black. He does the tomcat an injustice.

jake.vanderkamp@scmp.com

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This article is now closed to comments

pbhawk
Jake I normally agree with you but on the sub-prime mortgage issue I think you are wrong; many of these bankers made massive profits at the expense of investors and customers, knowing full well that there were dealing in worthless products; they were bailed out by taxpayers, left unpunished and continue to make massive profits today. Shareholders in JPMC should look at the performance of the CEO here and act accordingly; he should be fired immediately.
Giwaffe
Jake has a point here, but that’s not to say that no fine should be levied. Instead, the fine could be specific and targeted. For instance, why not collect it through a combination of clawback of past earnings and garnishment of future earnings of employees above a certain pay grade? Plus a prohibition on bonuses/stock options/warrants for the next five years?
shouken
Jake actually agrees with you. He is arguing that the prosecutors' collection of a large fine is in fact allowing the culprits to get off the hook, worse than ineffective in protecting public interests.
 
 
 
 
 

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