Bank of America Reaches Record Settlement with Justice Department, and Taxpayers Cover the Costs

Over the past year, the Justice Department has reached multiple settlements with the country’s largest financial institutions regarding their involvement in the 2008 financial crisis. JP Morgan Chase forked over $13 billion this past November, Citigroup settled for $7 billion this July, and now Bank of America will pay a record $16.65 to the DOJ. While all of these settlements involved the sale of toxic mortgage-backed securities to unknowing investors, the recent case is different. Under the guise of providing relief to homeowners who have lost their houses, BofA will actually stick the taxpayer with a bill of up to $5.8 billion for their wrongdoings.

mortgageThe settlement, reached last Thursday, is unique in that it actually allows Bank of America to write-off most of the cost as a tax deduction. Previous settlements with similar large banks contained more restrictions on this practice, but BofA will be able to treat the payment as if it were just another operating cost, for tax purposes.

Approximately $5 billion of the grand total is considered a “civil penalty.” Typically, money paid to resolve a civil penalty cannot be written off as a business expense, but a tenth circuit court ruled earlier this month that businesses may write off penalties such as these as a “compensatory cost.” If Bank of America doesn’t try to write off these $5 billion of civil penalties, the other $11.63 billion portion of the settlement will still stick the taxpayer with a $4 billion tab. If they succeed in writing off the civil penalties, the taxpayer will be on the hook for $5.8 billion.

This latest settlement seems particularly egregious due to the facts that there were no individuals prosecuted in the case, and the assistance programs set up to pay back defrauded homeowners are extremely difficult to qualify for. Even if we look past the fact that no single company in the history of the United States has paid this much money for a single case, the underlying problem still exists. The banks were able to get away with unlawfully ripping off millions of people who didn’t know any better, and there were no real consequences. Without consequences, there is no real deterrent for behavior like this to occur again in the future.

If you’re tired of supporting these behemoth institutions that let struggling Americans foot the bill for their deceitful practices, there is still a way to receive the financial services you need. By banking with a community development financial institution you can be sure that your account supports something positive. No longer will you contribute to a banking industry that continues to get away with financial crimes.

Green America’s responsible finance programs have the resources to help you ditch your megabank and take charge of your own money. Check them out today and start putting your money where it belongs: back in your own community.

Citigroup Reaches $7 Billion Settlement with Justice Department, but What’s Really Been Settled?

On Monday, July 14, Citibank agreed to pay a $7 billion settlement related to sub-prime mortgage-backed securities sold to investors during the lead up to the financial crisis of 2008. The settlement results from a Justice Department effort to crack down on the complex and risky behaviors that led Wall Street to the brink of collapse in 2008. While the overwhelming majority of Americans want to hold bankers accountable for gambling on peoples’ livelihoods, the recent settlements don’t represent a real victory for the population. If we break down the structure of the most recent settlement, it’s easy to see why.

www.freefoto.comCiti agreed to pay a total of $7 billion dollars to end a DOJ inquiry into its involvement in the financial crisis. Citi will pay $4.5 billion in cash, and $2.5 billion to provide relief to struggling homeowners and low-income tenants in the form of restructured mortgages. Of the $4.5 billion cash payment, $4 billion will go to the Justice Department as a civil penalty. The other $500 million will be paid as fees to state Attorneys General and to the Federal Deposit Insurance Corporation (FDIC).

There are a few reasons why this settlement looks more like a PR stunt than Citi actually trying to right any wrongdoing. First of all, the majority of the settlement will go to the agencies doing the prosecution, pretty much to spend at their discretion. The prosecuting agencies do not represent the true victims of the housing crisis, the ones who were aggressively sold mortgages that they had no chance of affording a few years down the line. The lion’s share of the settlement, in effect, settles little more than legal fees.

Citigroup can count the loan modifications it will make for sub-prime borrowers under the government Home Affordable Modification Program (HAMP) as part of the settlement. This program awards incentive payments to the bank to modify bad loans. Citi will actually receive payments for abiding by the terms of the settlement they reached with the government. The assistance to homeowners, those most affected by the financial crisis, will therefore be subsidized.

And as if the taxpayer hasn’t already paid enough for the egregious actions of large financial institutions leading up to the financial crisis, any mortgage principal reductions to homeowners from Citi will come in the form of earned income for tax purposes. Any supposed relief homeowners enjoy will be taxed as income, in many cases negating any relief in the first place. This is due to the expiration of the Mortgage Debt Relief Forgiveness Act, which Congress has failed to renew. Without this essential protection, the settlement might actually leave some borrowers worse off.

The settlement reached between Citi and the Department of Justice doesn’t even address the losses incurred by investors who purchased securities backed by sub-prime mortgages in the lead-up to 2008.

At the end of the day, Citi will pay $7 billion to get regulators and investigators off its back. The settlement comes after JP Morgan Chase reached a similar agreement to the tune of $13 billion last year. The DOJ collects more cash than it knows what to do with, the mega-banks continue to gamble with real peoples’ homes (increasingly in the rental market that grew as a result of the crash), and tax-paying citizens are left to foot the bill. Nobody involved with the packaging and sale of toxic mortgages will see the inside of a jail cell, and all parties involved will move forward as if the mess didn’t occur in the first place. If you’re tired of the illusion of justice in our legal and financial systems, Green America urges you to take the time and tell Eric Holder to re-prioritize the prosecution of those involved mortgage fraud. Unless the people stand up and demand justice, there will be nothing to deter mega-banks like Citi from driving the economy to the brink of collapse all over again.

Megabanks can afford to break the rules, but can the economy afford the risk?

ImageRecent high-profile settlements involving some of the nation’s largest banks have consumers scratching their heads. Since 2012, banking giants like Chase and Bank of America have come under fire from regulators in an effort to discourage the kind of egregious behavior that drove the economy to the brink of collapse in 2008. While the sums collected thus far by regulators appear to be huge, they are little more than a drop in the bucket for the megabanks. Have a look at some examples of the fines and settlements these banks have reached so far:

  • Bank of America has paid over $15 billion since 2007 to settle claims related to the financial crisis, including $11.6 billion to Fannie Mae in 2012 to resolve repurchase claims related to bad mortgages between 2000 and 2008.
  • Since October of 2012, American Express has refunded approximately $144.5 million to 585,000 customers for deceptive marketing regarding add-on products like payment protection and credit monitoring, as well as charging unlawful late fees to customers’ accounts.
  • Capital One paid $210 million to the Consumer Finance Protection Bureau in 2012 to reimburse customers that they deceptively charged for unnecessary services like credit monitoring, generally targeting unemployed people and those with poor credit.
  • Last year, Citi paid almost $1 billion to Fannie Mae resolving claims over nearly 3.7 million subprime mortgages it sold.
  • In addition to paying $1.32 billion to Fannie Mae and Freddie Mac over subprime mortgages, Wells Fargo reimbursed customers $203 million for organizing debit charges from highest to lowest, rather than chronologically, collecting excess revenues from overdraft fees.

These are only a few examples of settlements reached by banks and prosecutors. Consumer reimbursement accounts for only a small percentage of the fines paid; most of the time fees were collected by the FDIC and similar regulating agencies. Furthermore, these settlements account for a miniscule fraction of the damage done to the economy as a result of rule breaking or lax regulations and enforcement.

No one believes that the megabanks have learned their lessons, and several are once again engaging in speculative behavior and manipulating markets. For example, several megabanks are heavily invested in manipulating commodities. It was also recently revealed that Wells Fargo trained members of its staff to forge foreclosure documents. Despite continued efforts by regulators to control this sort of behavior, the banks employ massive legal resources to challenge regulations every step of the way.

If you believe that megabanks should be held accountable for deceiving customers and engaging in self-interested behavior at the expense of our society and natural resources, there are a few things you can do to make sure your voice is heard. First, you can move your account to a socially-responsible community development bank and stop supporting a megabank with your service and account fees – and let them know about it once you do.  Second, you can stop using lines of credit offered by megabanks – each time you swipe your credit card, they collect a percentage of your charge. You can find a list of cards from banks that benefit communities and devote a portion of their interchange fees to environmental protection or community development here. And finally, you can take action and tell regulators to keep putting pressure on the megabanks by writing and implementing rules that discourage deceitful behavior. The more you know about what these banks are really up to, the more you can do to make sure they start working for the people and the planet.

“Dad, What’s a Financial Crisis?”

“It’s something that happens every five to seven years,” Jamie Dimon told his daughter without a breath of sarcasm, writes Bloomberg financial reporter Bob Ivry in his book “The Seven Sins of Wall Street.”

As the United States navigates its way through a post-recession financial environment, our tendency to fall back on old habits makes the term “recovery” questionable at best. While there has been a concerted public effort to address the regulatory discontinuities that brought the global economy to the brink of collapse in 2008, mega-banks continue to use the same financial instruments to gamble with the lives of ordinary citizens. The mortgage-backed securities industry may have been in the spotlight for years, but cousin industries have flourished in its shadows. Here is an example of a new value-creating machine and how it threatens the economy.

wall stHousing                                                                                

Remember how banks were encouraged to sell as many mortgages as humanly possible, no matter what the circumstances? The “junk” or “sub-prime” mortgages, where the borrowers had no chance of making their outlandish payments, were grouped together and sold to investors as bonds. We all saw how well that turned out as soon as homeowners’ mortgage rates adjusted upwards and payments stopped being made; the ripple effect caused people in all corners of the economy to lose money.

Now, in the wake of mass foreclosures, Wall Street has found a new way to make money from the basic human need for shelter. Private equity firms have zoned in on certain housing markets, like in Riverside County, CA, and purchased blocks of foreclosed homes with cash. By doing this, they were able to artificially inflate the price of the housing stock, ensuring that first-time buyers are priced out of the market.

So what will private equity firms do with all of these empty, expensive homes? Rent them out, of course! With the inflated price of housing, however, people are now paying more than 50% of their income on rent in some regions. This leaves fewer dollars for other essentials like food, transport, and health insurance, let alone thousands of other industries that consumers support. With fewer customers, businesses make fewer sales, growth stalls and our nation’s economic output suffers.

But does a weak economy mean reduced profits for Wall Street? Private Equity firms aren’t stupid. There must be something about these foreclosed homes with value-creating capability. Enter “rental-backed securities.” Private equity firms like Blackstone bundle the revenue streams from rental payments into bonds, and then sell them to investors – much like mortgaged-backed securities. Though the first rental-backed securities received a triple A rating by evaluators Moody’s, Morningstar, and Kroll, the question of what will happen if rent payments begin to come up short looms. And with people spending more than half of their paycheck to keep a roof over their heads, it’s more a matter of “when” than “if” this will happen.

While the sale of rental-backed securities is slated to reach $70 billion a year, the wealth created by this industry will be transferred largely from the labor of renters to the far away-landlords on Wall Street. GDP will likely increase, but the purchasing power of thousands of Americans, especially younger, first-time renters, will be significantly diminished.

Rental-backed securities are just one of the ways mega-banks are maintaining their control and oversight of our economy. Despite their omnipresence, there are lots of things you can do to remove your support for practices like these and encourage a shift to a more just and local economy. By moving your accounts from your current mega-bank to a community development bank or credit union, you can be confident that each fee you pay will be pumped back into local causes, and not into the funds of private equity landlords. Green America’s  Break Up with your Megabank and Take Charge campaigns offer resources to help you start making the transition to an economy that works for the people and the planet today.

When in Doubt: Commit Forgery?

This week, Linda Tirelli, a lawyer representing a client in a foreclosure case with Wells Fargo came across a very disturbing piece of evidence: a company manual instructing the bank’s staff in how to forge documents to proceed with foreclosures.  The manual instructs employees how to process [mortgage] notes without endorsements and obtaining endorsements and allonges.  In essence, if employees lacked the documents needed for foreclosure, they were instructed to make them up.  As Tirelli stated to the Washington Post:

“This is a blueprint for fraud,” said Tirelli, who attached a copy of the manual as evidence in the lawsuit filed in U.S. District Court in White Plains, N.Y. “The idea that this bank is instructing people how to produce these documents is appalling.”

The disclosure of the manual has been duly reported in the business sections of major media, but has not made a huge splash.  It’s shocking that the media and the public are this numb to the latest revelations of fraudulent behavior by megabanks.  Two years ago, several banks paid a settlement of $25 billion for their fraudulent conduct in robo-signing mortgages (although much of that money never actually benefited the people who lost their homes).  Apparently, the money paid by Wells Fargo for its portion of the settlement was not enough to deter ongoing wrongdoing.  The bank is so emboldened by the failure of the US government to truly crackdown on bank fraud that it was actually willing to create a manual for engaging in fraud.

How is it possible that 5 years out from the financial crash, the steps taken by the federal and state governments to address widespread fraud and abuse in the financial sector are sorely lacking?  In a letter to the Justice Department sent on the same day that the Wells Fargo fraud manual was disclosed, three members of Congress – Elizabeth Warren, Elijah Cummings, and Maxine Waters – asked Eric Holder why the Justice Department was not prosecuting mortgage fraud more aggressively.  The letter calls out the fact that even though $200 million was appropriated to the FBI to investigate mortgage fraud between 2009-11, the FBI ranks investigating mortgage fraud as its lowest priority.  When nearly five million families have lost their homes due to the financial crash brought about by Wall Street, and when many of these homeowners lost their homes through suspect foreclosure proceedings, it is an outrage that the Justice Department is failing to take mortgage fraud more seriously.

What can we do as individuals?  One important step to take is stop banking with megabanks.  If you have a bank account with Wells Fargo, go to our Break Up With Your Megabank site to find community development banks and credit Unions that support people and communities instead.  If you have a credit card with Wells Fargo, use our Take Charge of Your Card site to get a card with a responsible bank or credit union instead.

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Why a Central Banking System Doesn’t Work for Everyone

Green America’s Take Charge Program urges consumers to support smaller, local financial institutions in lieu of megabanks. Here are a few reasons why local banks and credit unions benefit smaller communities across the country. 

Since the early 20th Century, The United States has relied heavily on its centralized banking system. Represented by the Federal Reserve and top-tier financial institutions, (such as Citi and Bank of America), a centralized system is one in which a single entity regulates a state’s currency, money supply, and interest rates. The Federal Reserve has many responsibilities, including regulating and supervising private banks, protecting the credit rights of consumers, and issuing the nation’s currency.

The role of large, wealthy private banks is important in understanding how the central banking system works. The Fed is not controlled by the government, but rather by a group of governing board members who are often employees of private megabanks. Private banks give the board information related to their particular economic situation, and Federal Reserve policy is based on their suggestions. In turn, Federal Reserve policy largely influences to whom, and by how much banks should lend their money.

www.freefoto.com, Ian Britton

The centralization of banking benefits wealth concentration and increases risks

Research suggests that “high-ability entrepreneurs” tend to gravitate towards a central banking system. Essentially, wealthy individuals and institutions enjoy the connectedness that a centralized system offers. Pooling together the resources of powerful entrepreneurs, however, increases the risk of losing all of that money by making poor lending decisions. Large, wealthy banks are able to spend more on screening potential borrowers so that they have the lowest chance of losing a large amount of money. Even so, due to their sheer volume of lending, a megabank’s ability to evaluate the underlying credit-worthiness of their borrowers is compromised at such a large scale. Despite their best efforts, risk is always present.

On the other hand, as a part of a decentralized system, banks face lower screening costs. Community investment banks and credit unions focus primarily on the specific regions they serve. Local banks spend less on the evaluation of potential small-scale borrowers, in part because of the modest needs of their customers and in part because they have less to lose by lending in the first place. As such, local banks can consider factors other than the bottom line, like a project’s potential benefit to or impact on the surrounding community or environment.

The difference in risk management costs leads to what researchers call a spatial bias. Think of New York City, where some of the largest banks in the nation are headquartered. Communities surrounding the central banks benefit from their proximity to the hub. After all, it’s much riskier to lend money to someone across the country than it is to lend to a neighbor. But what about the communities that are nowhere near a banking center? Credit-worthy businesses and consumers in these areas often have a hard time obtaining financing from megabanks, which prevents smaller communities from growing.

The higher risk faced by lending megabanks also steers their preference toward larger borrowers. It is less costly to screen one large entity seeking a loan than many small individual requests for risk. The problem is, large borrowers often need financing for some of the most damaging activities, like dirty energy and sub-prime mortgages (which helped trigger the economic malaise of the past 5 years). In addition to making those involved quite wealthy, these activities can have serious societal consequences – consequences that small, regional, low-impact borrowers would not likely cause.

Local Banks support what Megabanks Don’t

Areas with limited access to capital are best served by community investment banks and credit unions to finance homes and build infrastructure. These communities have relatively little to offer towards the megabanks’ record-breaking profits, and they frequently emerge as losers against investment opportunities considered to be “safe bets” by large banks.

What is particularly troubling about the influence megabanks have on our central system is that there is ample room for abuse – we have seen countless examples of megabank misconduct, and we know that the forces at play can be damaging to both the environment and communities.  For example, many large banks were recently fined billions of dollars for their role in the mortgage fraud that precipitated the Great Recession and are currently being sued by the FDIC for their role in manipulating LIBOR (an international interest rate).

Given this misconduct, we, as everyday consumers of financial services like modest lines of credit and checking/savings accounts, should support community investment banks and credit unions outside of the centralized sphere. Instead of supporting coal mining or questionable mortgage-lending practices, the fees paid for your bank’s services could go directly back into your own world, supporting community development and environmental protection projects. Unless your megabank can offer you something your local financial institution cannot, the decision to Take Charge should be a no-brainer.

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This Valentine’s Day: Ditch a Megabank Zero and Take Up With a Hero

Valentine’s Day is a time to celebrate the ones we love.  But what if your love is one-sided and you are on the losing end?  If you are giving your hard-earned dollars to a megabank – such as Citi, Bank of America, Chase, Wells Fargo – you might want to look at ending your relationship soon.  Ask yourself these questions:

  • Do you want to be in a relationship where your partner abuses the planet?  If not, you should be aware that Citi, Bank of America, and Chase are all major funders of coal mining and coal-fired power plants.
  • Do you want to be in a relationship where your partner rips you off?  If not, you should know that all the major banks and credit card issuers have been sued by federal and/or state authorities for abusive mortgage, credit cards, or other products.  And, big banks keep looking for ways to pile on fees.
  • Do you want to be with a partner that has a total disregard for others and takes no responsibility for its actions?  Chase, Wells Fargo, Citi, and Bank of America were all involved in fomenting the mortgage crisis that crashed the economy in 2008. They gambled with our money and then made us bail them out.

It can be hard to leave a long-term relationship.  You get used to a bank and think that it will be a big hassle to change, or you’ll lose out on some key benefits you love.  But, consider this:

  • Responsible credit card issuers that use your funds to actually help build communities offer credit cards (Visa or Mastercard) with all the benefits you have come to expect – online billing, points that you can use for merchandise or travel, and acceptance worldwide.
  • Responsible community development banks and credit unions offer checking, savings, and certificate of deposit accounts with competitive rates and more and more offer online banking.
  • Responsible banks and credit unions offer accounts and credit cards with lower fees, and are more upfront with their customers about fees (they don’t try to sneak the fees in or trick you into signing up for “programs” you don’t need or want).

Ready to make a responsible bank or credit union your Valentine this year?  Go to www.breakupwithyourmegabank.org to find hundreds of great banks and credit unions nationwide.  And, go to www.takechargeofyourcard.org to find responsible credit cards.