By Roy C. Smith
In November 2009 President Obama established the Financial Fraud Enforcement Task Force (FFETF) at the Department of Justice “to hold accountable those who helped bring about the last financial crisis as well as those who would attempt to take advantage of the efforts at economic recovery.”
FFETF has been very busy for the past eight years, having obtained approximately $200 billion of settlements of possible criminal or civil charges against almost all of the major banks in the US and Europe. The settlements were made with the boards of directors of the banks that preferred to avoid jury trials, further bad publicity and to get the matters behind them.
But, despite extensive investigations, FFETF has yet to indentify a single individual officer or director of a bank to hold accountable for bringing about the financial crisis (or the failure of their own banks). Thus the settlements are for crimes or misdeeds that no one actually performed, but that did not make them any less popular with the public.
The Senate and House hearings this week on Wells Fargo clearly demonstrate that bank-rage is still very popular with Congressional constituents. John Stumpf, who until last week was one of the country’s most respected financial executives as head of the best performing large bank in the United States, must have felt that he had been attacked by a lynch mob.
During the same week as the Wells Fargo hearings, a report that the FFETF had offered Deutsche Bank to settle charges of misconduct in its mortgage backed securities business ten years ago for $14 billion began a “run” on that bank’s stock and bond prices and credit worthiness. The run has continued – the bank’s market capitalization, which was only $20 billion when the announcement was made, has dropped to $17 billion.
Deutsche Bank is now experiencing a credit crisis similar to those faced by American banks and investment banks in 2008. Deutsche Bank survived the financial crisis without a bailout, but the subsequent years have been very difficult for Germany’s largest and most prominent capital markets player. John Cryan, a Brit, is the bank’s third CEO in eight years, and he is struggling to turn things around in a slow economy with a new, very heavy regulatory burden. The bank had reserved a much lesser amount for the FFETF settlement, but the news of the huge $14 billion offer to settle was enough to start the run.
The bank’s stock price (already down nearly 50% for the year) dropped further, as did the price of its “contingent capital” bonds (which convert to equity in the event of trouble). Counterparties cut their trading limits with the bank, institutional investors shied away from rolling over deposits or maturing money market instruments, hedge funds and others withdrew funds from prime brokerage accounts, and so a continuous downward spiral was triggered.
Such downward spirals befell Bear Stearns, causing it to be rescued by a $33 billion Federal Reserve-backed merger with JP Morgan, and Lehman Brothers, which was not rescued and went bankrupt and created a market panic that spread to other banks, including Goldman Sachs and Morgan Stanley that were saved from a similar spiral by the Fed’s converting them to into Bank Holding Companies.
Though Deutsche Bank is large and better capitalized than these other firms, and thus better able to sustain a run, runs can scale upwards to bring even the biggest banks down. The German government, led by an embattled Angela Merkel, does not want to bail out Deutsche Bank – the German public has no greater love for banks than the American public – but also cannot allow it to fail. The European Central Bank, however, has the authority and the resources to offer such “loans of last resort” as may be necessary to stabilize Deutsche Bank, but, even so, runs are very scary things that no government should want to risk on any “systemically important” bank.
The US government is clearly operating at cross-purposes. On one hand it is trying to generate jobs and economic growth, for which it must have healthy banks like Wells Fargo and all the other large US and European banks operating here. On the other hand, it needs to re-regulate the financial industry to prevent future crises, and to demonstrate that offending institutions will be punished.
But the government has gone too far in the regulatory and punitive direction, apparently to benefit politically from the popular anti-bank sentiment, and the result is an overly heavy regulatory burden on large banks that has threatened the viability of their businesses, and to let the FFETF loose to bring charges against the banks that they know will not have to be proved in court because they be settled for large sums to be paid by the shareholders of the banks that had nothing to do with the offenses alleged.
Healthy banks are essential to economic growth. Healthy banks need investors (shareholders) who believe in their futures and do not fear continuing attacks from the government. Increasingly, these investors are becoming scarce.
After ten years, it is time to for the government to end the public anger against banks, which it helped to foster, and help the industry to get back on its feet. Certainly the Obama administration and its FFETF will do nothing along these lines during its remaining months in office. Based on the campaign rhetoric so far, neither competing candidate seems to want to do so either.
So, until the rage burns off, we seem to be stuck with mob rule on banking matters.