Huffpost Business
Mark Gongloff Headshot

Risky Business Pays Off For Wall Street: Financial Crisis Penalties Pale Compared To Profits

Posted: Updated:
The Wall Street bull looms over protesters during the financial crisis of 2008. Banks have avoided significant penalties in the wake of the crisis. (Photo by Spencer Platt/Getty Images)
The Wall Street bull looms over protesters during the financial crisis of 2008. Banks have avoided significant penalties in the wake of the crisis. (Photo by Spencer Platt/Getty Images)

To listen to bankers tell it, President Barack Obama has been their worst nightmare. But considering how easy banks have actually had it since the financial crisis, Obama seems to be a banker's dream come true.

The banks can count the Dodd-Frank financial reform act, some $2 billion in penalties, and occasional criticism from the president and other Democrats among the horrors they have had to endure since the crisis. Relative to the profits they made before and after, these don't even rise to the level of minor inconveniences. And that makes it more likely we'll see more bank misdeeds in the future.

"This doesn't just reward past crime; it incentivizes future crime," Dennis Kelleher, CEO of the nonprofit group Better Markets, said of the penalties the banks have paid since the crisis. "It's less than the cost of doing business."

There have not been, and likely never will be, any federal criminal convictions for crisis-era bank misdeeds. Obama's Justice Department doesn't even bother keeping statistics on convictions related to the financial crisis, the Wall Street Journal reported earlier this year. High-profile cases against executives at Goldman Sachs, American International Group, Lehman Brothers and Countrywide Financial, institutions at the center of the crisis, have been dropped.

The Securities and Exchange Commission has done most of the heavy lifting in exacting some measure of justice from banks and bankers for crisis-era misdeeds, but not so heavy that the SEC might actually develop muscles or anything.

Unlike the Justice Department, the SEC does keep stats on its efforts, such as they are: It has charged 112 people and banks in the wake of the crisis, including 55 top executives. It has extracted $2.19 billion in penalties and other cash from the banks and bankers.

But $2 billion is a rounding error in comparison to the profits the banks raked in before and after the crisis, and the damage they did to the economy during the crisis. Kelleher of Better Markets estimates that Wall Street paid out $200 billion in bonuses between 2003 and 2011. And in the year before its London Whale trading debacle, JPMorgan Chase alone was making nearly $5 billion per quarter, on average, in net income after taxes, meaning it could pay the entire industry's crisis-era fines twice over with just three months of work.

Give JPMorgan a few years, and it could cover the entire industry's $2 billion in fines 20 times over: In the three years leading up to the crisis year of 2008, the bank made $38 billion in after-tax profit. In the three years that followed, JPMorgan made $48 billion. In 2008, its profits tumbled all the way down to $5.6 billion, or nearly three times the total fines paid by banks as a result of the crisis.

And that is just one bank, albeit the largest bank in America by assets. Even a far smaller bank, Goldman Sachs, could bear the brunt of the entire industry's regulatory fines very easily if it had to. Goldman has paid the largest single fine by far as a result of the crisis, $550 million to settle charges that it misled investors about bundles of bad mortgages that were hand-picked by other investors betting against them. That's a lot of money to you and me, but to Goldman -- which, of course, did not admit to the charges -- it's not much. The bank made $8.4 billion in profit in 2010, the year it agreed to the fine. It has made more than $26 billion in the past three years and nearly $27 billion in the three years before the crisis.

In the crisis year of 2008, Goldman turned a total after-tax profit of $2.3 billion -- enough to pay the entire industry's crisis tab.

Meanwhile, the big banks benefited for years after the crisis from an armada of government-subsidized lending programs. One initiative alone, the Term Liquidity Guarantee Program, likely saved banks an estimated $24 billion in borrowing costs.

Of course, this has not stopped the banks from lobbying furiously against financial regulatory reform to prevent another crisis. The securities industry has spent more than $250 million in lobbying since 2010, according to the Center for Responsive Politics. That money was focused most intensely on periods in the past few years when the Dodd-Frank reform act was being passed or shaped, according to the Wall Street Journal.

The banks have also had plenty of cash to throw at political campaigns. Wall Street has spent $164 million on the current election, the Center for Responsive Politics reported on Wednesday, putting the financial industry on pace to trump the record $170 million it spent on the 2008 campaign. Some of that cash has gone to Obama and other Democrats, but most of it is going to Mitt Romney and his fellow Republicans, who have pledged to repeal Dodd-Frank.

In fact, the American Bankers Association is expected to vote Thursday on whether to form a super PAC to donate money to Senate candidates who want to roll back financial reform, Bloomberg reports.

As Bloomberg's Phil Mattingly wrote recently in a separate story, a full Dodd-Frank repeal probably wouldn't happen even during a Romney administration and with Republicans in control of both houses of Congress. Instead, the banks would prefer to get some of the toothier aspects of the law repealed, leaving "a patina of protection for investors and consumers," as Mattingly wrote. That doesn't sound all that far from the situation today, with Dodd-Frank implementation already hopelessly muddled by bank lobbying.

If there is a silver lining to this story (or a dark cloud for the banks), it is the appropriately harsh punishment the stock market has rendered. Combined, JPMorgan, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and AIG have lost a whopping $594 billion in stock-market value since the end of 2006, just before the dawn of the crisis, according to FactSet data. Many shareholders are suing the banks over their crisis-era behavior. Citigroup recently settled one such suit for $590 million.

The banks have also suffered lasting damage to their reputations, leaving them vulnerable to more regulation and higher capital requirements around the world, which could crimp their profitability in the years ahead. But that also means the banks could eventually seek other, more creative ways to make money.

Given the lack of severe consequences following the worst financial crisis since the Great Depression, it is hard to imagine bankers seeing much downside in gambling with the global economy once again.

HuffPost Live will be taking a comprehensive look at the corrupting influence of money on our politics on Sept. 6 from 12-4 p.m. EDT and 6-10 p.m. EDT. Click here to check it out -- and join the conversation.

Below are 14 things Obama doesn't want you to know:

Close
14 Facts Obama Doesn't Want You To Know
of
Share
Tweet
Advertisement
Share this
close
Current Slide

Around the Web

Citi to pay $590 million to investors - The Term ... - Fortune Finance

Left demands Wall Street be punished for economic crisis ...

Matt Taibbi: Wall Street Has 'No Fear Of Individual Punishment'

Deadlines Loom To Bring Financial Crisis Cases

Stop Wall Street's war on women

The Unrepentant and Unreformed Bankers

The unrepentant and unreformed bankers

SEC whistle-blower program is starting to pay off

Matt Taibbi: Goldman Case Shows Eric Holder 'Has No Balls'

Federal Investigators Punt On Goldman Sachs Prosecutions

No letup from DNC protesters, public in anger toward banks, Wall Street