Much like slim ties and classic oxfords, settling out of court is all the rage with the financial industry this season.
If you’re like me, you’ve probably played Monopoly a few times in your life. Also if you’re like me, every game of Monopoly has ended the same way. With the banker stealing from the treasury for the entire game, then when one of the other players eventually finds out, that person flips over the board and everyone agrees never to play Monopoly ever again. That’s until next year when everyone has forgotten how fucking terrible Monopoly is.
The reason I bring up Monopoly is that you might remember the US economy having their own “flipping the board over” moment in 2008 with the housing crisis. But instead of losing the Monopoly top hat, it was your life savings.
Recently there was news regarding the credit ratings firms Standard and Poor’s and Moody’s. Or as you may know them as those guys that nearly destroyed the US financial system by giving AAA ratings to mortgage backed bonds, knowing they were garbage, while bragging about it in internal emails.
Yeah, those guys.
Well earlier this month the credit ratings firm Standard and Poor’s had reached a $1.4 billion settlement with the Justice Department and other state organizations over their involvement with the 2008 housing crisis. As the case against Standard and Poor’s nears to completion, the Justice Department is now looking at the credit ratings firm Moody’s, to see if similar indiscretions were made. Even with the hefty fines however, many watchdog groups are complaining that the punishment doesn’t go far enough.
Ok now you probably have a lot of questions.
Does this fine acquit them of any wrongdoing?
Why are people saying billions in fines isn’t enough?
Why does that one credit ratings firm share their name with a hardcore Japanese porn studio?
The reason watchdog groups like the nonprofit Better Markets are so upset, is that S&P essentially just got a massive fine for almost bringing down the entire financial industry. Most of everyone’s frustration stems from the settlement itself. Within the settlement’s terms, there are “non-disclosure” clauses littered throughout, so the public will never know the individuals at S&P that did it, how S&P actually profited from their actions, or even who was directly harmed by S&P’s actions! In many ways, S&P basically paid a ton of money to wipe away all liability on the matter.
That is insane if you figure even Martha Stewart went to jail for five-months due to insider trading. And last time I checked, Stewart’s insider trading didn’t cause the global financial system to collapse!
Also for those that say $1.4 billion is still a lot of money to fine any institution for wrong doing, I would argue that you have to take this all in context. Last year the S&P Ratings Services alone brought in $2.45 billion in 2014, an 8% increase from the previous year. What’s even crazier is that McGraw Hill Financial – the people who own the S&P credit ratings firm – posted a fourth quarter 2014 revenue of $1.29 billion and this is after taking into account various expenses including the $1.4 billion fine from the US government!
Oh but brace yourselves, it’s about to get a whole lot more depressing.
The most troubling aspect of the S&P settlement isn’t that it happened, but when compared to the banking industry, they were hit the hardest! Many financial institutions involved in the 2008 housing crisis made deals with federal and state offices to buy their way out of liability. But when it comes to the banking industry, those deals were even more absurd!
Take Bank of America for example. Last year Bank of America agreed on a $17 billion settlement with federal and state departments over their involvement in selling toxic mortgages before the financial crisis. While many in the media – including the Justice Department – touted it as a record setting fine, the truth is that these institutions didn’t take that much of a hit.
As this chart from the Wall Street Journal shows that Bank of America, J.P. Morgan Chase, and Citigroup didn’t pay that much in their settlements considering they were essentially principle actors in the 2008 housing crisis. For example, Bank of America – which many financial experts attest should be taking most of the blame for the housing crisis – made $84.25 billion in revenue for 2014, which their “record breaking settlement” of $17 billion meant their payout as a percentage of their revenue was only 20%!!!
And out of the three banks, Bank of America got the worst of it!
J.P. Morgan Chase and Citigroup only had a payout percentage of 14% and 9% with each company getting a $13 billion and $7 billion fine respectively to their 2014 revenue of – and I shit you not! – $94.2 billion and $76.88 billion!
We’ve now entered “a duck swimming in gold coins” levels of wealth here. I don’t mean that figuratively either. Someone on the Internet actually calculated how much wealth one would have to acquire to make this possible. So according to their calculations, any of these three banks – using only one year’s revenues – could easily create a replica of the Scrooge McDuck vault; TWO OR THREE TIMES OVER!!!
Ok let’s end this by bringing it back to Monopoly once again. Now say if you were playing Monopoly with a seven-year-old kid as your banker. Now as everyone knows, children at that age are adorable little assholes and if given the responsibility of being the banker, they will always steal money from the treasury. But say the next time that happens, instead of giving them a lecture on why cheating is wrong and ending the game, just take about $100-$200 from their hand and know that they have a bright future in the financial industry!
Who says Monopoly doesn’t teach kids about money.
(Photo Credits: Google Images, Hasbro, Wall Street Journal, TheBillFold.com)