The $34 billion in settlements that the U.S. Justice Department won in recent months from Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) for selling bogus mortgage-backed securities certainly grabbed plenty of headlines. On Thursday, Bank of America agreed to pay $16.65 billion, the largest settlement stemming from the housing crisis.
Unfortunately, many experts don't think the payments will do anything to deter future wrongdoing by Wall Street.
The reason why is simple: Although the government has outlined numerous instances where bankers knowingly misled investors about the riskiness of the loans that were bundled into securities, those individuals have largely escaped any punishment. Given the magnitude of the settlements the banks reached, many experts believe that future criminal prosecutions are unlikely, although the civil settlements don't necessarily preclude them.
"I don't think it's a deterrent by any means," said Dennis Kelleher, the head of the Better Markets Initiative, a Wall Street watchdog organization in an interview. "Basically, you have got all these people who literally got away with crimes... Why would anybody under those circumstances ever not do it again?" He said, "It's actually rewarding crime and incentivizing more crime."
Many experts such as Stanford University Finance Professor Anat Admati aren't optimistic that bankers in the future won't repeat the mistakes that got them in trouble in the past. "I think people have a right to be angry," she said during an interview, "It's an incredibly inefficient system."
Indeed, many of the people who were responsible for the misdeeds that fueled the worst financial crisis since the Great Depression are probably still working on Wall Street. JPMorgan CEO Jamie Dimon and his counterpart Lloyd Blankfein at Goldman Sachs (GS) led their respective multi-billion financial behemoths through the Great Recession.
Dimon kept his job even after the $6 billion London Whale trading loss, which the blunt-talking CEO described as "The stupidest and most embarrassing situation I have ever been a part of." Blankfein also isn't in danger of unemployment either even as the New York-based bank tries to reach a similar settlement with the DOJ. According to the Financial Times, Goldman is nearing a $1 billion settlement with the Federal Housing Finance Agency over allegations that it understated the magnitude of the risk of the mortgage-backed securities that it sold.
Morgan Stanley failed to get out of a lawsuit alleging that it sold $600 million worth of toxic mortgage securities. Earlier this year, it agreed to pay $1.25 billion to overseer of Fannie Mae and Freddie Mac to settle claims.
"The key point is that the worst of the abuses occurred at the height of the bubble, when the prospective gains to be had from cutting corners look so good, and the prospects of being later singled out from the crowd for punishment look so remote, as to render a 'just do it' or 'go for broke' mentality," writes Cornell Law Professor Robert C. Hockett in an email.
The Department of Justice rejects the criticism that it has been soft on Wall Street in connection with the financial crisis, noting that it has pursued cases related to the manipulation of LIBOR and insider trading and has filed mortgage-related fraud charges against more than 4,000 defendants between fiscal year 2009 and 2013.
"These include charges against executives, officers and traders at JPMorgan, Goldman Sachs, SAC Capital, Morgan Stanley, UBS, Rabobank, Stanford Financial Group, Bankers Trust, Bear Stearns, and other institutions," the DOJ says in a statement provided to CBS MoneyWatch.
"Moreover, we are still investigating various matters in this area. ...Our record demonstrates that when the evidence and the law support it, we have not and will not hesitate to bring cases against anyone, regardless of his or her position, and if the evidence and the law do not support it, we will not bring charges, regardless of the popularity of such restraint."
Former Countrywide CEO Angelo Mozilo has become a poster child for the wrongdoing by banks that led to the financial crisis. The U.S. Justice Department reportedly plans to file a civil case against Mozilo for failing to disclose the extent of the risks involved in the mortgage securities the bank sold. The statute of limitations for criminal charges had lapsed.
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