An article in the Yahoo News (reprinting a French newspaper article) (H/T Housingwire) describes the US as the world's bank cop when it comes to punishing the bad behavior of the world's biggest banks.
Handing out multibillion-dollar fines right and left to domestic and foreign financial giants, the United States has taken on the role of the unforgiving global cop of the business world.
In stark contrast to the relative inertia of white-collar law enforcement in Europe, Washington most recently brought the hammer down on Deutsche Bank and Credit Suisse, which sold junk-filled, mortgage-backed securities ahead of the 2008 financial meltdown.
Deutsche Bank has agreed to a payout of $7.2 billion, while Credit Suisse settled for $5.3 billion to resolve American authorities' allegations and avoid the lengthy headache of a trial.
Instead of dragging financial firms to court, the US has taken them to the cashier.
American giants have not been spared: JP Morgan Chase, Citigroup, Morgan Stanley and Bank of America collectively have shelled out $40 billion to settle cases linked to toxic, crisis-era financial products.
"There's a kind of fundamentalism to US law," said Nicolas Veron, a senior fellow at the Brussels-based think tank Bruegel and the Washington-based Peterson Institute.
"If you break the law, punishment comes down."
While the European authorities haven't been totally "dormant," according to at least one regulator European regulators lack an important ally in the fight to punish bad banks that US regulators can always count upon: bottom-feeding class action plaintiffs lawyers.
In the United States, authorities can be supported in their actions by so-called class-action lawsuits brought collectively by groups of private individuals who have been wronged, which can ratchet up pressure on companies. But this option does not exist in Europe.
Well, European nations need to reform their civil laws to unleash the dogs of class-action war, in which banks settle for sums that do little to change behavior or provide any substantial economic reward to harmed class action members (other than the lead plaintiffs recruited by the lawyers), but which enrich the living Hades out of the law firms that bring the suits. In the UK, they'll need to get rid of the nasty "English Loser-Pays Rule" that awards the prevailing party its legal fees and costs, since that might give the defendants the incentive to fight to the finish on the merits, rather than paying extortion because it will cost them less in the long run. If Europe can just be "More Like Uncle Sam," it, too, will soon find itself invaded by the only life form other than cockroaches that will survive a nuclear holocaust.
There are some interesting aspects of the hyper-activity of US regulators against "enemies" both foreign and domestic that the French didn't catch. One involves the fact that aggressive regulatory enforcement actions and the imposition of "multi-billion dollar fines" on the biggest banks might be of questionable deterrent value. Take, for example, the $7.2 billion settlement squeezed by the US out of Deutsche Bank. According to Deutsche Bank's press release on the settlement, the impact on the bank is less than heavy.
In connection with the resolution of this matter, Deutsche Bank expects to record pre-tax charges of approximately US dollar 1.17 billion in the financial results for the fourth quarter as a consequence of the civil monetary penalty. The financial consequences, if any, of the consumer relief are subject to the final terms of the settlement, and are not currently expected to have a material impact on 2016 financial results.
How much punishment has been inflicted if the bank takes the licking and keeps on ticking with "no material impact" on financial results? The giant banks take these shots routinely. The amounts of the fines may hurt, but not severely. Do they change behavior? Perhaps, but don't kid yourself that the U.S. is some global cop that meets out "justice" to big banks on a global scale in a way that consistently deters bad behavior or even inflicts serious pain upon miscreants.
Another interesting aspect involves the comments from a European observer that its regulators "'do not dare' punish their national flagship companies" to such an extent. Regarding banks, one likely reason has to do with the fact that there are comparatively few banks in any one European country, all or most of them extremely large. Six years ago, we discussed such banking systems, in connection with an opinion piece by a talking head who wanted the US to become more like Canada, with only five banks. As we alleged then, and as we continue to allege, "regulatory capture" is a logical consequence of a limited number of large banks. We think "do not dare" will also become the mantra of the US regulatory regime, the more concentrated its base of regulated banks becomes.
One final thought: while regulations themselves can be a barrier to entry, so can enforcement actions. While Deutsche Bank, Credit Suisse, Chase, Wells Fargo, and Bank of America can afford to pay for legions of compliance personnel to attempt to keep the bank out of trouble in the first place and for big-brained lawyers with boxcar loads of minions to throw paper blizzards at government enforcers when they bring the hammer down (albeit with a ball peen hammer rather than a sledge hammer), community banks cannot do so (although they might hire expensive lawyers to save their bacon in bet-the-bank litigation). Also, they generally cannot afford substantial fines nor the loss of customers due to unfavorable publicity to the extent that big banks can. Witness Wells Fargo. While lax regulatory enforcement benefits no one but those destined to run aground, aggressive enforcement can become just one more entry barrier to the banking business, as if community banks needed another.
If, indeed, the U.S. is becoming the world's bank cop, I hope that it gets a lot more judicious about how it goes about dispensing "justice."