This week executives and government officials across the western world have been frantically clearing their desks before the start of the holidays - and before the year ends.
Washington’s mighty Department of Justice is no exception. On Friday morning, the DoJ announced that it had reached a settlement with Deutsche Bank and Credit Suisse to pay $7.2bn and $5.28bn fines respectively for mis-selling mortgage-backed securities during the last decade’s credit boom.
The negotiations behind this have been tortuous. But by cutting a deal now, the DoJ not only wraps up these cases before the holiday season, but also, crucially, before the Obama administration leaves office in late January, prompting the inevitable personnel overhaul in Washington.
And that means that the DoJ officials can now close the book on 2016 with a historical victory of sorts. Close to a decade after the credit bubble burst, they have extracted payments from most major banks over their crazy subprime mortgage antics that brought the global financial system to its knees. Indeed, if you add up all the fines that US regulators have imposed for mis-selling mortgage securities, this has almost reached an eye-popping $60bn; and that does not even include the additional settlements with UBS and RBS that are likely to occur in the next few months.
Critics of the banks - such as Senator Elizabeth Warren - might complain that this does not really represent real justice. The size of the fines looks distinctly arbitrary, and while the billions are big this is still far smaller than the profits the banks enjoyed during the subprime boom. Moreover, it is unclear how the money extracted will be used. In the UK, the British government has earmarked some of the fines that have been collected from banks for charity; but in the US the penalty money tends to vanish into obscure (and sometimes peculiar) government pots. A portion of the fines imposed on Deutsche and Credit Suisse will be used for “consumer relief” purposes, such as loan modification. It is unclear what that really means.
Another, more serious shortcoming of these penalties is that they will hit current shareholders rather than the bank executives who caused the subprime problems in the first place. That reduces their deterrent message as far as the bankers are concerned, and undermines the sense of justice. It would have been much better if some of these penalties had been paid out of bonuses that were previously awarded to executives. Many voters (and some politicians) might question why so few executives have gone to jail. After all, in the aftermath of the 1980s Savings and Loan crisis, hundreds of bank executives faced personal punishments.
Nevertheless, imperfect justice is better than no justice. Friday’s ruling even offers a modicum of relief for Deutsche and Credit Suisse. Never mind the fact that the fines are smaller than some analysts had feared (not least because only about half of the penalty needs to be paid immediately) the two banks can start 2017 knowing that this chapter has come to an end - and that they can focus on core operations. This is particularly important for Deutsche, which has been haunted by rumours of an impending government bailout.
The only question now is how long it will be before the banks forget the painful lessons of the subprime mortgage bubble and start dabbling in the same type of behaviour in search of quick profits. It would be nice to think that the answer is “a very, very long time” or even “never”. But believing that is about as hard as believing in Father Christmas. Bankers’ memories tend to be painfully short.
