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$128 Billion In Bank Settlements. Proposed Legislation To Improve Settlement Disclosures

Last week, the Huffington Post and U.S. Senator Elizabeth Warren (D-Massachusetts) posted an interesting infographic about the vast sums banks have paid in settlements for alleged wrongdoing. If you haven't seen the infographic, it is definitely worth a view.

The Huffington Post reported:

"Since 2009, big banks in the U.S. and Europe have paid at least $128 billion to regulators, according to data compiled by the Wall Street Journal, Reuters, and The Huffington Post, for issues tied to the housing collapse and other financial misdeeds, including aiding and abetting money laundering and tax evasion."

Some statistics from the infographic:

  • Bank of America: $61.1 billion
  • JPMorgan: $31.4 billion
  • Citigroup: $10 billion
  • Wells Fargo: $5.8 billion

View the infographic to see more. This suggests an industry in crisis and out of control. Consider a 2013 ethics survey which found that young bankers view wrongdoing as a necessary evil and fear reporting misconduct. Sadly, some of these settlements have been tax deductible, but often such details aren't disclosed. When settlements are tax deductible, that means taxpayers -- you and I -- who did nothing wrong, are really paying part of these fines. Do you want to pay part of these fines and settlements? I don't, and I doubt that you do either.

The Charlotte Observer reported about the problems with many settlements:

"... the fact that a portion of settlements can be tax-deductible sends the wrong message to the public.... every dollar in tax write-offs for the companies has to be made up for by the government in higher tax rates, cuts to programs or more national debt... The really pernicious thing here is both the (government) agencies and the banks have an incentive to tout larger but illusory pretax numbers. The agency looks good because they get to hold up a bigger number. The company gets a better bottom line because it can get a big write-off... The only one who loses is the public."

On August 12, U.S. Senator Elizabeth Warren posted on Facebook:

"Since 2009, the big banks and financial institutions have paid at least $128 billion to regulators for the tricks and traps that brought down our economy. But they are happy to pay the fines – in fact, JP Morgan gave its CEO Jamie Dimon a 74% raise for negotiating its settlement. If these settlements are so weak that Wall Street is celebrating, it's not a good deal for the American people. That's why I introduced the Truth in Settlements Act to require accessible, detailed disclosures about settlement agreements. Just a couple weeks ago, the bill made it through the Senate Homeland Security & Governmental Affairs Committee and can now receive a full Senate vote. We're one step closer to stronger transparency and accountability."

Executives often use settlements as a way to avoid admitting any wrongdoing (and to avoid jail time), Some highlights from the Truth in Settlements Act (Adobe PDF):

"If enforcement agencies are confident that settlements are a good deal for the people they represent, they should be willing to publicly disclose the key terms of those agreements. The Truth in Settlements Act demands specificity and transparency in all federal agency settlements that include over $1 million in payments. The Act ensures that relevant details and terms of non-confidential settlements are publicized truthfully, and that the process by which settlements are deemed confidential is assessed and monitored..."

Specific provisions in the legislation require federal agencies to:

  1. Explain in written public documents what and which portions of the settlement are tax deductible, and any applicable tax "credits" included
  2. Explain how the settlement payments are classified (e.g., restitution, compensation, penalties, etc.) and the tax implications
  3. Post online at their websites basic information about settlements over $1 million, with copies of the settlement agreements and details
  4. Explain why they agreed to a settlement with confidential or secret portions
  5. Report each year to Congress the statistics about both any settlements over $1 million and any settlements with confidential portions
  6. The General Accounting Office (GAO) to study and analyze the confidentiality issues, plus make, "legislative and administrative recommendations for reform"

The Act also requires companies that settlement with federal enforcement agencies to publish in their SEC filings whether they have deducted any settlement payments from their taxes. You can easily track online the progress of S 1898 (The Truth in Settlements Act).

The Act sounds like an excellent deal for consumers and taxpayers. You want to know what your government is doing so you can hold it accountable. Contact your elected officials and demand that they support the Truth in Settlements Act (S 1898).

What are your opinions of the huge banking settlements? About the tax deductions in many settlements? Of the Truth In Settlements Act?


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Chanson de Roland

While in some cases, it may be consistent to permit the deduction of settlements as business expenses, that should not be so where, as in the case of these banks, the settlements are with banks for alleged and/or indicted wrongdoing. In such cases, the settlement should not be deductible on the same reasoning whereby criminal fines aren't deductible: To wit: wrongfully acts are not normal business activities but are malum in se acts, that is, inherently evil acts, which, unlike business expenses from licit activities, the law should not obliged the government and ultimately the taxpayers to subsidize.

If the banks believe that they are innocent, then let then defend and seek vindication in their respective criminal cases in court. If they prevail, then they pay nothing; however, if they lose, they pay criminal fines, which are not deductible; they must publicly acknowledge their guilty acts; and, though the criminal conviction is not proof of civil liability, all of the evidence adduced at a bank’s criminal trial will be available in civil actions for anyone wronged and damaged by their evil acts.

As the matter stands now, it looks as if justice is for sale: Simply pay a settlement and employees avoid jail for their crimes; with a settlement, employees also, under D&O insurance or other provisions, get their legal and other related expenses paid for, which would not be the case for their criminal acts; the banks may continue their operations without much disruption and no reformation of their cultures and business practices; civil plaintiff are left to their own devices in obtaining remedy for their wrongs; and justice of this sort can be had on the cheap, as taxpayers subsidize the costs of these tax deductible settlements.

This isn’t fair, for I can assure you that, if you, the ordinary guy, is ever charged with a crime, you will either go to trial, where your life, liberty, and/or property will be jeopardy, or you will enter into a settlement with the government which will involve conviction, jail time, and, where appropriate, non-deductible criminal fines. Paying a tax deductible settlement and then going home to sip a mint julep won’t be an option.

So we have two sets of laws: One for major corporations and their executives, where paying for serious crime is just like paying for a somewhat more expensive parking ticket, and another for the rest of us, where crime is punished as an evil act.

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