Forget Dodd-Frank and Basel III, big banks are under attack by old, obscure banking laws that are being dusted off to take aim at the behemoths that are often too big to prosecute using the ordinary measures they’re prepared to battle. As banks face mounting fines and capital requirements levied by regulators, could the staggering cost of litigation further burden bottom lines and lead to layoffs?
In the latest effort, a U.S. federal judge this week said that the Justice Department can use a savings-and-loan era law in cases against Wall Street titans, including Bank of America, Wells Fargo and Bank of New York Mellon.
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U.S. District Judge Jed Rakoff in Manhattan said a "straightforward application of the plain words" of the Financial Institutional Reform, Recovery and Enforcement Act is permissible in the government's case, which is set for trial on Sept. 23. Prosecutors claim that a program started in 2007 by Countrywide called "High Speed Swim Lane,” or "HSSL" (Hustle,) caused thousands of fraudulent and defective mortgages being sold to Fannie and Freddie.
The FIRREA law enacted in the aftermath of the savings and loan crisis of the 1980s was designed to revamp the savings and loan industry and regulation of thrifts, not as a weapon against the biggest banks.
The act gives the government broad authority to bring civil claims, has a low burden of proof, strong subpoena power and a 10-year statute of limitations, double the time of most fraud cases.
Fighting strange laws will run up big bills for the banks already burdened by legal costs. Global banks already are spending hundreds of millions of dollars on legal costs each quarter.
Take Bank of America. The second-largest U.S. bank by assets spent $881 million on litigation in the first quarter. In June, the bank said it would pay $500 million to settle a class-action lawsuit led by pension funds and other investors who claim they were misled about $350 billion worth of mortgage-backed investments they bought from Countrywide.
BofA President and CEO Brian T. Moynihan has been slashing costs in an effort to swell profits as the bank forks over enormous sums for three big government lawsuits. It’s been less than a year since the bank axed 16,000 jobs and outsourced property reviews to India, even on the heels of 40% rise in mortgage production.
The growing threats to banks are global. FIRREA isn’t the first little-used law has been lifted from its grave to go after global banks.
New York’s Department of Financial Services invoked an obscure banking law to revoke consultants’ access to confidential supervisory information if the access does not “serve the ends of justice and the public advantage.”
In June, Deloitte agreed to a one-year suspension from soliciting new consulting work from hundreds of financial institutions and agreed to $10 million to New York amid a major crackdown on independent consulting firms. DFS cited Deloitte’s “misconduct, violations of law, and lack of autonomy” in its review of anti-money laundering practices at Standard Chartered.
DFS fined Standard Chartered $340 million last year to settle allegations that the U.K. bank hid from regulators critical details involving at least $250 billion in transactions with Iran and potentially violated U.S. sanctions policy. DFS claimed Deloitte “aided” the bank’s “deception” in hiding transactions linked to Iran.
When U.S. state and federal authorities last December decided to not indict HSBC in a money-laundering case, it became as much an issue of the type of law being invoked as it was a case of illegal or legal actions.
HSBC agreed to a record $1.92 billion settlement with authorities amid accusations it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.
But the federal Bank Secrecy Act that requires financial institutions to report any cash transaction of $10,000 or more and to alert regulators of suspicious activity was never intended to target the international banking system.
Congress passed the BSA in 1970 to fight money laundering in the U.S. and to prevent financial institutions from being used as vehicles by criminals to hide or launder dirty money. Besides, what HSBC did was legal in the U.K.
A newer, yet lesser-known law will make it harder to hide money overseas. The U.S. and Canada this week agreed to enact the Foreign Account Tax Compliance Act to keep super rich Americans from secretly scrolling away millions in the Cayman Islands.
The 2010 Fatca law forces foreign banks, including the Royal Bank of Canada, HSBC, Bank of Nova Scotia, Bank of America, Deutsche Bank, UBS and CIBC FirstCaribbean International Bank, to report their accounts to the U.S. Internal Revenue Service or face being slapped with as much as a 30% withholding tax.
A group of U.S. senators wants to resurrect a version of the repealed Depression-era Glass-Steagall Act. The lawmakers want a new version of the law that was repealed in 1999 to separate commercial banking activities insured by the Federal Deposit Insurance Corp. from institutions that offer services such as investment banking, insurance, swaps dealing, hedge funds and private equity.
Bringing back the 1933 law would directly target the biggest U.S. banks. “Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” said U.S. Sen. Elizabeth Warren. “The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk.”
As odd as these laws and their interpretations may seem, at least they’re not evoking any (obviously) fascist laws.
Stephan Götzl, president of Bavarian banking association Genossenschaftsverbands Bayern (GVB), compared the European Commission’s proposal for or a single authority to oversee the winding down of Europe’s troubled banks to the Enabling Act, a1933 amendment to the Weimar Constitution that gave the Nazis the power to enact laws without the involvement of Germany’s legislative body the Reichstag.
“We in Germany have had a bad experience with enabling acts,” Götzl said last month in response to a presentation by Michel Barnier, EU commissioner for internal market and services a regional banking convention in Munich.
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