Search results

The purpose of this paper is to examine the ways in which the USA has sought to hold the leading banks to account for the financial crisis and to asses the validity of the methods used. This is the first of two articles which looks at the basis of the Complaints against the banks and the settlements which led to the imposition of large fines on the banks.

The paper first provides an account of the government housing policy from 1995 to 2008 and argues that the cases brought against the banks and then at the legal basis of the charges. The methodology consists of a careful examination of the documentary evidence and an analysis of the changes in the relevant laws used by the Department of Justice when bringing charges against the banks.

The paper concludes that both the basis of the cases against the banks and the purpose of large fines are open to question.

Much of the information is available. However, as the major cases against the large banks did not go the court, and the basis of the fines is a settlement between the bank and the Department of Justice, each fine is supported by a relatively brief “Statement of the Facts”. The evidence amassed by subpoenas issued by the Department of Justice is not tested in court.

Much greater consideration must be given to more effective ways of holding banks and especially senior executives to account.

The imposition of large fines does not satisfy the public desire to see that justice is done. Such fines imposed on the ban are not likely to change bank behaviour.

Its originality lies in setting out an account of government housing policy and its role in the run-up to the financial crisis. No one has carried out a careful analysis of the cases against the large banks brought by the Department of Justice and, in the second article, by the Federal Housing Finance Agency.

The purpose of this paper is to examine the basis of the complaints against banks which sold private label securities to Fannie Mae and Freddie Mac before the financial crisis. The examination shows that all but one of the cases was settled out of court. Nomura and RBS went to court, but the case against them was based on dubious evidence and on strict liability which only enabled the judge to set aside relevant evidence. The Securities and Exchange Commission’s evidence against senior executives of Fannie and Freddie shows that they deliberately purchased PLSs based on subprime loans to meet the government’s housing targets.

The research was based on publicly available documents, including details of the Federal Housing Finance Agency’s (FHFA) complaints against the banks in question, the settlement agreements published by the DoJ, FHFA and SEC. Furthermore, it includes documentary evidence from the Financial Crisis Inquiry Committee and Senate Committees, the full transcript of the trial, opinions of the judge for the trial and the judgement.

The findings are that many have concluded that settlements out of court fail to satisfy the demand for justice. They have been criticised as a trade-off between the prosecutor and the bank, with a view that the imposition of large fines is to pay back taxpayers’ money spent on rescuing the banks, rather than punishing those responsible. Such fines do little, if anything, to change the behaviour of banks. As a result, the Department of Justice issued a memorandum on 9 September to focus on individual accountability for corporate wrongdoing. It remains to be seen how many cases against senior executives will result from the change in direction.

The implications of the research are that it is important even in the aftermath of such a serious if not devastating financial crisis to ensure that the laws are properly applied and can stand up to any challenge that it has been stretched to obtain the results the administration of the day wants to see. In addition, care must be taken over both the imposition of large fines and the use to which the monies should be put. All the parties involved in bringing about the crisis should be held to account. The major cases against the banks have almost all been “resolved”. A change in direction has now taken place.

The practical implications of holding individuals to account should now be tackled. It requires a careful examination of the laws and regulations already in place to ensure that it is clear within a bank as to who is responsible for what. It will only be possible to hold senior individuals to account if the laws are clear and if all the evidence is not hidden. It may also require a review of the contracts under which senior executives are employed, because to remove a person from his post and then find that he still has a large pension pot and bonuses due may not result in justice either. A delicate balancing act is required because banks require highly competent and motivated individuals to run them.

If a very large fine is imposed on a bank, the shareholders and customers pay. The shareholders will mostly own the shares through their pensions and their savings in mutual funds.

There have been few studies of all the cases against the banks brought by the DoJ and FHFA and still fewer have recognized the fact that government housing policy was the source of the extent of the subprime mortgages.