Too-big-too-fail banks are paying record amounts to settle mortgage-related malfeasance dating back to the financial crisis, and everyone seems to think that’s good news.
It is… and it isn’t.
Not including legal costs and other lawsuits, Bank of America Corp. just settled for $16.65 billion, which beats the previous record $13 billion JPMorgan Chase & Co. paid.
The total and final tab for both banks’ forays into the mortgage securitization sinkhole will never be known. But based on what they’ve paid out so far, their combined costs will easily exceed $100 billion.
Don’t get me wrong. I’m happy the banks are paying up. And I’ll be sad when they’re done paying, because the damage they caused will linger for decades.
But I’m worried about the cost…
Earning Their “Thank You” Cards
I’m not worried about what the past cost. I’m worried that the TBTF banks won’t do what they did during the last crisis again.
Lest we forget, JPMorgan Chase bought Bear Stearns, and Washington Mutual and Bank of America bought Countrywide Financial and Merrill Lynch & Co. While both banks would have had losses and faced litigation even if they didn’t “rescue” the failing giants, the hasty acquisitions are costing them now.
Will these costly acquisitions ever pay off? Maybe they will. Maybe they already have. That’s not the point.
What worries me is that when the next crisis hits, and it’s brewing, the TBTF banks aren’t going to make the same mistakes they made last time. They’re not going to “rescue” anybody without a never be jailed/never be sued “thank you” card… hand signed by the Treasury secretary and the president.
Why on Earth would they ever again expose themselves to all these lawsuits, settlements and “distractions” when they can have their cake next time and eat it, too?
That’s what’s going to happen. That’s the bad news with all these settlements.
The TBTF banks are all a lot bigger. And their competitors are all getting bigger, too, in order to compete with the giants.
Size matters when there are failures. Only the biggest banks can absorb giants, and they’ll have to. And they’ll do it gladly, because they won’t have any contingent liabilities to worry about next time.
It’s really simple math.
The Federal Deposit Insurance Corp. can’t bail out a giant insolvent bank without a lot of taxpayer assistance. The FDIC’s guarantee fund is relatively tiny compared to the losses any single giant bank failing would cost.
That’s why failed banks are almost always merged into healthier or bigger banks. And even then the FDIC sometimes has to pony up some money.
So when the next banking crisis comes and TBTF banks are asked to rescue failing big banks or, heaven forbid, another TBTF bank, they’ll say, “Not without a hand-signed thank you card.”
And they’ll get it.
The so-called “living wills” that banks submitted last month – the worthless plans they put together to convince their regulators they could be liquidated in an orderly fashion if the implode – didn’t fly with the regulators.
After all, pigs will never be able to fly. And once one of these TBTF institutions fails, it’s over.
One giant will topple another – it will be like dominos falling. And the only way to rescue them will be to merge them with a thank you card.
Is there a better way? Sure there is. But it’s never going to happen.
The only way to secure the banking and financial services engines of modern-day monster economies is to make them all smaller and have more of them. That way a one-off failure won’t infect the entire system as it did in 2008.
But don’t worry. Everything is going to be fine… until it isn’t.