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There’s a Cost to All This Good News

9 | By Shah Gilani

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.

Think about that number: $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.

9 Responses to There’s a Cost to All This Good News

  1. Alice Maxwell says:

    The telephone number fines being “Paid” by all these banks make great headlines for bank haters but I wonder if those “fines” are really paid. I never hear about what account they “vest” and how they leaven our national debt.up or down.
    I also don’t understand why shareholder groups are not suing re these fines since they come right out of depositted funds the bank holds, uses so they are paid by bank customers. In effect, these fines are one reason we do not get any return at all from our normal bank holdings..

    These bank fines are announced always by the Justice department. Are the fines theirs for a job well done?

  2. Duane says:

    Shah, I think you’re right about the big banks and other articles you’ve written about the big financial players taking America to the cleaners. Alas, the only way these things will ever change is when the public gets truly, “over the top”, fed up with it all. Our government officials need a severe reality check if they are ever to change their ways. Right now politicians are clearly in it for their own benefit and not for the benefit of the nation. Treasonous behavior really.

  3. Terry says:

    What me worry? After all it isn’t rocket science. it is simply money. Me, myself and I are worried about the 400 billion per year taxpayers pay, thanks to our “representatives”, in interest to the owners of the fed res. Surely BOA, et al are owner banks and have billions upon billions of interest income to tide them over any rough spot. Heck, they do not even have to invest diligently to get this income stream. The govt “trusts” them so the govt has borrowed 18 trillion from the Fed Res so far. And still borrowing and spending. The govt has a new income stream now. It is called Quack Easing. Easy come, easy go is our elected officials financial policy. And has been for decades!

  4. Ken says:

    I totally agree. These financial behemoths are much too big and getting bigger, and yet the average person goes on about their lives, not worrying about anything as long as they can make their credit card and mortgage payments. It’s this disconnect from the real problems that will end this civilization very soon. Add to that the fact that the banksters are the world’s worst economists. They are true blue gamblers, and perennial losers at that, and like spoiled children, we are expected to look after them and clean their diapers whenever they soil them. And the execs who create the messes are TBTP.
    Look at Angelo Mozilo, the head cheese at the now defunct Countrywide Financial. His machinations have been well publicized. According to the information at hand, he is guilty of fraud and insider trading, and yet he has never been called to account. And there is John Paulson, a hedge fund manager, presiding over a gargantuan gambling portfolio, who was called in by Goldman Sucks to select the worst mortgages in their extensive portfolio of junk. He performed this task and then, after this junk had been sold to gullible retirement and mutual funds sold them short. When they collapsed he collected billions. These stories have been documented in the movie, Inside Job, which everyone should see.

    • Ken says:

      I forgot to add that Mozilo cashed in all of his Countrywide stock for $490 million (about $45 a share) when he saw that his scheme wasn’t working out, and then after his company crashed, Bank of America bought it out for $4 a share, and awarded Mozilo a $155 million bonus for destroying his company. If any of us did this kind of trick, we’d be sharing a cell with Bernie Madoff. By the way,
      the only reason Bernie wound up in jail was that his con was too small. He was a minnow in the pool with man-eating sharks.
      By the way, if you want to see where we’re going now, read II77 B.C.: The Year Civilization Collapsed by Eric Cline, who is a professor at Washington Univ. in St. Louis. This will give you some idea of where we are headed. It was just published in March, and is an excellent contribution to our knowledge of historical cycles.

  5. chris Macann says:

    Regarding your CIA insider and his claim that a Belgium front is buying all the Bonds needed to replace those Russia and China are selling. Could it work like this, for if it does it means the FED is not winding down QE3, as they say they are.
    The TBTF banks borrow money from the FED at 1/2%.
    They send it to branches in Belgium instructed to buy US bonds at say 2.5%.
    Everyone’s happy. The Fed are getting a little money from the banks to raise their reserves. The banks are making 2% without any risk, which they invest in the stock market. US interest rates are kept low despite the withdrawal of international investors. And there is no impact on inflation, becomes none of this new money gets into the economy. Could it really be as easy as this for the FED to go on printing money? .

  6. Rudy says:

    I read somewhere recently that all of these “huge” settlements will be allowed by the U.S. Treasury to be written off against taxes due, so that in essence the rest of us taxpayers are really subsidizing perhaps 80% of the settlements — i.e., the money to pay them is really coming out of OUR pockets, a sort of double jeopardy, that WE are paying back the banks for the “punishment” they are receiving. There should be a law passed by Congress prohibiting this. I’d like to see Shah comment on this, and if it is true, as I assume it is, start raising some dust to take the blindfold off the public’s eyes, and force the media to report the total truth.

    –Rudy

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