Citi, Bank of America in Standoff With Regulators

Bank fines no longer inconsequential
By Antonio Perez
Antonio Perez
Antonio Perez
June 16, 2014 Updated: June 16, 2014

Ongoing negotiations to settle certain mortgage-related allegations between federal regulators and two of the biggest U.S. banks appear to be at a standstill, raising the specter that they may be sued as early as this week.

The Justice Department had been investigating Citigroup Inc. and Bank of America Corp. since earlier this year, regarding their roles in the mortgage-backed securities market. However, discussions have deteriorated in recent days and the sides have broken off negotiations, according to a Bloomberg report.

The investigations center on the roles Citigroup and Bank of America had in selling eventually worthless mortgage-backed securities in the years leading up to the financial crisis.

Federal regulators are preparing to file a lawsuit against Citigroup as early as this week, sources told Reuters last Friday. The Justice Department had asked for a settlement of $10 billion or more, and Citigroup balked at the price.

It is believed that Citigroup’s potential fine is especially large considering the bank’s small market share in the mortgage-backed securities business. According to SEC filings, Citigroup sold less than $100 billion of nonagency mortgage-backed securities between 2005 and 2008—a fraction of the amount churned out by its competitors Bank of America, JPMorgan Chase, or Wells Fargo.

Separately, the Justice Department and Bank of America remain far apart in resolving their dispute. According to Bloomberg, the feds asked for a fine of $17 billion, while Bank of America had offered to pay at most $12 billion. The $17 billion would have been the biggest fine of any bank to date.

It is unclear if the regulators are preparing a lawsuit against the Charlotte, N.C.-based bank, Bank of America. The bank, third biggest in the United States based on market capitalization, has worked in recent months to put all financial crisis and mortgage-related suits behind it.

Getting Tough

Federal regulators are taking bold, tough stances against big banks for their roles in the financial crisis, the related collapse of the housing market, and other financial crimes such as assisting in tax evasion and money laundering.

The recent about-face comes years after the time period immediately following the recent financial crisis, when governments were criticized for their perceived inaction and leniency toward financial organizations.

Regulators are issuing more civil lawsuits, which carry lower burdens of proof than criminal suits, to extract settlements from defending parties.

BNP Paribas SA, France’s biggest bank by assets, is in negotiations with U.S. regulators to settle allegations of ignoring U.S. political sanctions. The fines, originally estimated to reach $10 billion, could now be as high as $16 billion, according to Reuters.

Last month, Swiss banking giant Credit Suisse AG paid $2.6 billion to settle claims that it had helped wealthy Americans avoid U.S. taxes.

JPMorgan Chase & Co. has agreed to pay almost $26 billion between this year and last year to settle various investigations surrounding mortgage issues, derivative trading, and other allegations.

A Twist of Fate

In the decades leading up to the financial crisis, banks have considered governmental investigations and the resulting settlements as a cost of doing business.

In the past, the fines levied have been a small fraction of revenues generated from such activities—a slap on the wrist. Tens of millions, or hundreds of millions of dollars were enough. A $1 billion fine was considered the ceiling.

Those days are long gone. Regulators frequently seek settlements in the billions of dollars. And that is concerning given the grim outlook for future revenues in today’s regulatory environment.

For governments, the nature of investigations and the size of fines are largely predictable. Foreign banks tend to receive the majority of criminal charges (Credit Suisse and potentially BNP), while the nature of investigations are tailored to generate easily digestible sound bites: “subprime mortgages,” “high-frequency trading,” and “tax evasion.”

The BNP fine and possible criminal indictment, especially, has ramped up political tensions between France and the United States, with some European leaders arguing that the fines are excessive. Laurent Fabius, France’s foreign minister, called the potential BNP fine “unreasonable” on public television.

European politicians even took the issue to President Obama, who defended the U.S. judicial process by saying that he does not meddle in such proceedings.

For BNP, $10 billion is a lot of money, especially considering that the European economy is still on the mend and that European banks are already facing substantial pressures to increase capital. A fine that size increases such concerns exponentially. BNP’s collapse could be catastrophic for the French economy.

For U.S. banks, the argument centers on the government’s investigations at predecessor firms it once strong-armed the banks to purchase during the financial crisis. In 2008, the Federal Reserve effectively brokered Merrill Lynch & Co.’s sale to Bank of America, and Washington Mutual and Bear Stearns’s sale to JPMorgan Chase as a way to avoid a collapse of the U.S. banking sector. Years later, punishment is cast upon those once deemed as saviors of the financial system.

Once upon a time, a financial firm accused of wrongdoing would face a run on the bank or industry scorn, making it difficult to continue operating. Now, Wall Street largely overlooks fines on wrongdoings—investors tend to cheer settlements.

Today, the only certainty lies in that favors and fortunes are fleeting as the wind.

Antonio Perez
Antonio Perez