The U.S. Government and the Major Banks: Justice for Sale at the Bazaar

In the final weeks of the Obama Administration, the administration of justice to the banking sector has far more in common with the ancient customs of a Middle Eastern bazaar than with the customary stately trappings of the U.S. legal system.

Bazaar mentality

Banks haggle, their executives make offers and government officials counter-offers. Compromises are offered. In the case of Deutsche Bank and Credit Suisse, they are taken. In Barclays’s case, they are rejected.

Politics has been more intrusive this time in the negotiations than before. This has added to the sense that marketplace haggling is what the administration of justice to the banking sector is all about in the United States.

The arrival of Trump motivates the DoJ

Top lawyers at the Justice Department, knowing that president-elect Donald Trump has vowed to reduce regulation of the financial system, were more determined than ever to finalize deals.

The cases go back to the 2005-2008 period. when Americans were buying sub-prime mortgages that contained fine print that warned of major interest rates rises within quite a short period.

Many of the homeowners could not afford the higher rates and would be forced out of their homes. Those mortgages were packaged into what were said to be high-quality securities and sold by the banks to unwitting investors.

The Justice Department has alleged that the banks perpetrated fraud. The sub-prime crises were the spark to the global financial crisis, millions of Americans did lose their homes and millions of investors lost their money.

Day of reckoning

Now, on the eve of Christmas, came the day of reckoning. This is always a good day to issue press releases with bad news that most people, already celebrating the joys of the year, might not even see.

News reports in September, based on leaks by people close to the negotiations, suggested that Deutsche Bank could face a $14 billion fine that could pose an existential threat.

However, as its negotiators met with the Justice Department’s officials in Washington, they knew the history of deals for similar mortgage-fraud related allegations.

• BankAmerica had settled with the Justice Department for $17 billion.
• JP Morgan Chase’s chairman, Jamie Dimon, did a deal for $13 billion (and his board of directors was so happy that they gave him a bonus).
• Most recently, GoldmanSachs negotiated a $5billion agreement.

Deutsche Bank’s lawyers clearly believed that the Justice Department would be more willing to reach a compromise settlement far below the $14 billion figure. They were right.

They negotiated a final deal for $7.2 billion. The bank’s share price immediately rose on the news as investors were relieved.

Another European banking giant that finds itself on the ropes, Credit Suisse, closely tracked the Deutsche Bank negotiations.

It seized its chance to wrap things up with a deal on the same day, just before the holidays, at $5.3 billion. The Swiss bank’s investors were also pleased with the outcome.

Barclays gambles on Trump

But at Barclays, headquartered in the UK and run by American James Staley, calculations were running in a different direction. The bank concluded that opting for no deal now will eventually prove less expensive than a compromise agreement.

Barclays executives must think Trump likes banks — and they may be right. That is why Barclays said no to a deal. The U.S. Department of Justice immediately announced that it would fight the case in court.

Broader questions left unanswered

Aside from the question whether haggling and political calculation is the way in which justice should be administered to the banking sector, broader questions loom large.

The biggest one is this: To date, not a single top banker has been put on trial, let alone sent to prison, for the massive frauds that have been perpetrated by the institutions they lead.

Of course, the top executives now in charge at Deutsche, Credit Suisse and Barclays can rightfully claim that they are just clearing up the mess they inherited.

They are all relative newcomers to their institutions who had no connections of any kind to the executive teams who ran these banks in the first decade of this century when the alleged crimes were perpetrated.

A very measured reaction under Obama

Underlying the approach that the U.S. Department of Justice has taken is the conviction that the fines imposed and the prosecutions secured should never be so great that they risked the existence of the banks.

The most recent actions highlight the fact that the top Justice Department officials in the Obama Administration have never wavered in their belief that some banks are just too big to fail and thus also too big to jail.

Will Trump be different?

The Trump Administration is unlikely to take a different view. It has vowed to deregulate the banks. Some of its officials in the transition team have even stressed that they consider it wrong that these big settlements result in heavy costs to shareholders.

Deutsche and Credit Swiss have now put the threat of even larger fines behind them and will be relieved. Barclays may in the end, however, be seen to have pursued an even less costly strategy.