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Is Justice Served?

The headline is eye-popping—a $16.65 billion penalty assessed against Bank of America. The Justice Department said it was the largest settlement with a single entity in American history. To those unfamiliar with the situation, one should conclude that Bank of America committed seriously heinous crimes.

The agreement resolved more than twenty investigations from prosecutors across the country. To settle the investigations, the bank will pay a $9.6 billion cash penalty and $7 billion in “soft-dollar” payments to help struggling consumers. In exchange, the Justice Department will forgo future cases against the bank over fraudulent mortgage products called collateralized debt obligations.

Attorney General Eric Holder stated, “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue.” After Holder concluded his remarks, Associate Attorney General Tony West added, “This agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct.”

Really? How so Mssrs. Holder and West?

Only $7 billion is actually going for “relief.” This includes reductions in mortgage principal and payments for consumers having trouble keeping their homes, funds to rehabilitate or tear down derelict housing and assistance for building or refurbishing affordable rental properties.

About $1 billion goes to specific pension funds for teachers, law enforcement and fire fighters in California, Delaware, Illinois, Kentucky, Maryland and New York.

Unfortunately, more than half of the funds go to the federal government for settling pending and potential claims for residential mortgage-backed securities, collateralized debt obligations and other types of fraud. 

Adding in all penalties and settlements, Bank of America has now paid more than $50 billion to settle mortgage problems with investors and various government agencies.

In reality though, Bank of America itself did little to incur the wrath of regulators. Instead, it was two divisions of the mega-bank—Countrywide Mortgage and brokerage operation Merrill Lynch.

As the financial crisis gained serious momentum, Bank of America purchased Countrywide Mortgage. They already had a $2 billion investment in the large mortgage company and evaluated buying the remainder. Although the bank spent four weeks evaluating the Countrywide assets, it was considered by many insiders to be a hurried deal.

Be that as it may. Bank of America, and its leadership, were knowledgeable professionals who should have known better.

The Merrill Lynch purchase was quite different.

On September 14, 2008, at the height of the 2008 financial crisis Merrill Lynch was acquired by Bank of America.

However, it has later been revealed that during congressional testimony by then Bank of America CEO Kenneth Lewis, as well as through internal emails from the House Oversight Committee, that Bank of America was threatened with the termination of its management and directors as well as a strained relationship between the bank and federal regulators, if the bank did not acquire Merrill Lynch.

It was a forced marriage from the beginning. Whether Bank of America wanted to be there or not was immaterial. The federal government ensured the takeover.

In assessing statements from Holder and West it is helpful to remember that these acts were not perpetrated by Bank of America employees. It seems rather unfair to hold them exclusively responsible.

Furthermore, corporations do not engage in criminal behavior. People do. And the people who committed these acts of greed are long gone. There were no perp walks or jail time—just lots of grandstanding by politicians blaming evil corporations. So much for providing relief to homeowners, justice or restitution.

Mr. Holder and Mr. West: until individuals are held accountable, greed and bad behavior will not change. Send the true offenders to jail and you will get their attention and change bad behavior. In the meantime, the only ones you have punished are the shareholders of Bank of America and the remaining employees who are left to clean up the mess.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published September 2 2014, Victoria Advocate