David R. Henderson  

Where Did the $110 Billion Go?

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In our sister blog four days ago, George Mason University law professor Michael S. Greve does a huge service in a few words.

He highlights the fact that the feds have taken $110 billion--that's right: billion with a "b"--in fines just from banks. I was seeing those billions here and billions there and had wondered about the total. Professor Greve links to an excellent investigative report by two Wall Street Journal reporters, Christina Rexrode and Emily Glazer, in which they document what they could account for and what they couldn't.

I've got to say, though, that because I have such distrust in the government, I actually found the following sentence heartening:

• The Treasury Department received almost $49 billion of the funds, including money the agency received directly and sums funneled to it by other departments, including government-chartered housing associations Fannie Mae and Freddie Mac. How the money is spent isn't specified.

That's a $49 billion drop in federal debt.

But I found these four items the kind of thing I expect of government and dislike intensely:

• About $45 billion was earmarked for "consumer relief," a category that includes money dedicated to helping borrowers and funding housing-related community groups.

• The Justice Department, whose prosecutors led many of the negotiations with banks, collected at least $447 million. How it spends the money isn't specified.

• States received more than $5.3 billion, usually to spend as they saw fit. Almost all states received payments from a national settlement in 2012 over mortgage-servicing abuses, and seven also received payments in the Justice Department's blockbuster mortgage-securities settlements that started in 2013.

• Roughly $10 billion went to other recipients, including housing-related federal agencies, two federal agencies responsible for cleaning up failed banks or credit unions, and whistleblowers who helped the Justice Department. Some funds from these deals typically revert to the Treasury.


Consider the first: "housing-related community groups." How do they deserve that money?

Or take the second: $447 million will pay for a lot of prosecutions. Congress should regulate that.

The third: what did state governments do to deserve that money?

This is one gigantic scam. Kudos to Ms. Rexrode and Ms. Glazer for documenting it.


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COMMENTS (13 to date)
Scott Sumner writes:

Good post, Our federal justice system has become a way of raising lots of revenue without having to go through Congress. I expect either Clinton or Trump to use that even more aggressively than Obama.

Hana writes:

I hate to use the expression, 'there ought to be a law', but all governmental agencies are perversely incentivized when fees, fines and penalties flow back into the overseeing agencies. While it may not always be the case, at least sometimes the funds are able to be used above and beyond budgeted approvals.

The executive branch has traditionally been controlled using the power of the purse. What happens when they can get funds from fines and forfeitures instead?

Jonathan Murphy writes:

"About $45 billion was earmarked for "consumer relief," a category that includes money dedicated to helping borrowers..."

Presumably, this phrase means giving funds to borrowers so they could pay off their debts. Assuming this to be true, then some of the funds are just working their way back to the banks. It's like debt forgiveness, but with extra steps.

AS writes:
Congress should regulate that.

Tacking on another regulation won't do much. The only solution is to abolish the source of power altogether.

R Richard Schweitzer writes:

While it may appear that those billions were extracted from banks and financial firms, they are in fact extracted from the public (in its economic activities) through banks and others as ultimate transaction costs.

Think about it.

In addition those firms have incurred enormous legal expenses; again in the billions, which costs will be passed through.

These kinds of transaction costs not only add nothing to production of goods or services for which there may be demands; they reduce available funding and distort distribution.

What they do is add to the autonomy of the powers of the Federal Administrative State; allowing those who make it up access to direct political powers as well. We are observing the beginnings of our second (and real, in terms of public impacts)government which is maturing into completely extra-constitutional form and purposes.

teller writes:

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Andrew writes:

Anyone else notice the irony of this story coming out the same day as the Federal courts are scolding the Ferguson, MO government for doing the exact same thing? Using the court system to fund local government.

About $45 billion was earmarked for "consumer relief," a category that includes money dedicated to helping borrowers and funding housing-related community groups.
Which is how we got into the housing bubble in the first place. As Charles Calomiris and Russ Roberts discussed a while ago;
Calomiris:.... In the case of the United States we had activist groups allied to bankers that were in the process of creating mega-banks, through the 1990s merger movement [?]. To the point that at Federal Reserve Board hearings about mergers, activists would show up--for example, from ACORN (Association of Community Organizations for Reform Now) and testify on behalf of the Bank of America merging with NationsBank. This is not the usual role that you would imagine an activist group taking vis-a-vis a bank merger. So you get these very unlikely partnerships which precisely because they straddle partisan lines were extremely durable and made it very hard for any party to deviate from the agreement.
Russ: It's an interesting coalition because as you point out, there are a lot of voters in the discussion. Those are the homeowners, who are clearly a lot of those. But in general in democracies, large groups don't get treated particularly well. So I see it is--my somewhat cynical, perhaps realistic take, is that they were a vehicle to give cover to giving money to these much smaller and politically powerful groups--the realtors, the home-builders, and the banks who financed them through the political incentives that were inherent in the system.
[Calomiris]: Well, they got everybody who was part of that winning coalition in the game of bank bargains did quite well, thank you. So the total amount of subsidized credit that was contractually agreed as a quid pro quo for those activist groups to show up at the merger hearings, which is an understatement of the amount they actually received, was almost $870 billion over the period 1992-2007. So that's not chump change.

Here's a piece Calomiris and Stephen Haber did for National Review which explains in detail how the activists collaborated with the banks to lower lending standards;

Activist groups soon came up with a way to solve this problem: They enlisted political allies in the House and Senate to force Fannie and Freddie to buy bank mortgages generated through CRA commitments. Senator Alan Dixon of Illinois convened a Senate Banking Committee hearing in 1991 and invited representatives from ACORN and other activist groups to testify — and they went after the underwriting standards of Fannie and Freddie with hammer and tongs. Consider the testimony of the Director of ACORN Housing: “It is ACORN’s observation that the underwriting criteria employed by Fannie Mae and Freddie Mac have been developed not for the general mortgage market, which includes low and moderate income homeowners, but for a middle income and substantially suburban mortgage market. As a result, it is our firm belief that the underwriting standards dictated by the secondary mortgage market are, at a minimum, income discriminatory and may, by extension, be racially discriminatory [emphasis added].”

The managers of Fannie and Freddie could see that they were being outmaneuvered, but they were not powerless, passive observers. In return for agreeing to lower their underwriting standards in order to purchase CRA commitment loans, they obtained the right to back their mortgage portfolios with paper-thin levels of capital, and to be regulated by an office within the Office of Housing and Urban Development (HUD) that had little power and no experience in financial-services regulation. In short, Fannie and Freddie agreed to go along with purchasing high-risk loans provided they could fund the expansion of their portfolios with borrowed money, and by virtue of Fannie and Freddie’s special charters as Government Sponsored Enterprises those debts were implicitly guaranteed by the U.S. treasury, which is to say by taxpayers.
Charlie writes:

"billion with a "b"--in fines just from banks."

Were you able to track down where the money came from? In some reports it says that this $110 billion is the aggregate "settlement" in over 30 cases. A settlement and a fine seem like quite different things.

"the feds have taken $110 billion"

If it's over 30 cases, it probably includes cases of the states vs the banks activities that violated state laws. Maybe the confusion is due to aggregating fines and settlements into one big pile.

Brad writes:

Generally, all money received by federal agencies must be deposited with the Treasury Dept. This is to disincentivice bad behavior, but apparently Congress has provided a way for other uses.

jan olaf sipkes writes:

Since 2009 the Bank fines total $204BN ! And thats the official in-take. USA Police I understand have hoarded another 3BN
from businessmen without legal charges. The Pentagon is missing 8 trillion ??
What,happened to "accountability" ?
Where is the US congress ?

It's yr country but it sounds like Fascism to me far from the democratic society I knew in my happy student years in Ny.
Time to react.

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