(FROM THE WALL STREET JOURNAL 3/10/16)
By Christina Rexrode and Emily Glazer
The nation's largest banks paid fines totaling about $110
billion for their role in inflating a mortgage bubble that helped
cause the financial crisis. Where did that money go?
In New York, the annual state fair is using bank-settlement
money to build a new horse barn and stables. In Delaware, proceeds
are being used to subsidize email accounts for local police. In New
Jersey, a mortgage firm owned by a former reality-television star
collected $8.5 million as a reward for reporting a bank's
misconduct.
Banks also helped tens of thousands of homeowners with their
mortgages in neighborhoods from Jacksonville, Fla., to Riverside
County, Calif., funded loans for low-income borrowers and donated
to dozens of community groups and legal-aid organizations.
Yet some of the biggest chunks of money stayed with the entity
that levied the fines in the first place. Of $109.96 billion of
federal fines related to the housing crisis since 2010, roughly $50
billion ended up with the U.S. government with little disclosure of
what happened next, according to a Wall Street Journal
analysis.
The Journal reviewed the terms of more than 30 settlements,
filed public-records requests with a dozen agencies at the federal
and state level and spoke to dozens of homeowners and others who
obtained payouts, tried to or were otherwise involved with the
distribution of the settlements. The results represent the most
detailed breakdown yet of the billions paid out in the
unprecedented deals.
Out of the $110 billion, the Journal found that:
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.
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.
The White House said tens of billions of dollars have been
recovered for American consumers since 2009, including funds that
went to government agencies and programs and the Treasury,
according to Deputy White House Press Secretary Jen Friedman.
The lack of detailed disclosure bothers some people. "The
government has a responsibilityto its citizens to be transparent
about where its revenues are going," said Aaron Klein, who focuses
on financial regulation for the Bipartisan Policy Center in
Washington, D.C. "When settlement funds just go into the black box
of the general fund of the government, who is accountable?"
Bank executives grumble privately about the opaque process and
are critical the government didn't ensure more money went to
housing-related issues.
Given the historic scope of the fines, the money "shouldn't just
be a slush fund," said Francis Creighton, executive vice president
of government affairs at the Financial Services Roundtable, an
industry group.
The settlements arose from bank behavior prosecutors said fueled
the housing crisis and aggravated its effects. Among other things,
banks were accused of pushing expensive mortgages on unqualified
borrowers, selling hundreds of billions of dollars of securities
that they knew were likely toxic and filing fraudulent paperwork on
people being booted from their homes.
The Journal analysis included fines paid by the four biggest
U.S. banks -- Bank of America Corp., J.P. Morgan Chase & Co.,
Citigroup Inc. and Wells Fargo & Co. -- as well as investment
banks Morgan Stanley and Goldman Sachs Group Inc. One settlement,
the Justice Department's $16.65 billion deal with Bank of America,
was the biggest ever imposed by the U.S. government on a single
entity.
The analysis excluded settlements from private lawsuits --
including some investor suits that resulted in multibillion-dollar
payouts -- as well as fines levied on banks for conduct outside the
housing and mortgage crisis.
Fines generally are funneled to the Treasury, which manages the
federal government's finances. There, the money goes into the
government's general fund,where it can be spent on any budgeted
item, including employee salaries or reducing the deficit. The
Treasury Department said the settlement money isn't specifically
tracked.
A spokesman, Rob Runyan, said the funds are "spent as Congress
authorizes."
Most of the money attributed to Treasury in the analysis came
indirectly. Fannie Mae and Freddie Mac, which buy loans from
lenders and package them into securities, and their regulator, the
Federal Housing Finance Agency, collected more than $34 billion in
fines. The bulk was transferred to Treasury, which spent $187.5
billion to bail out Fannie and Freddie during the financial
crisis.
The housing companies said they have been profitable since 2012
and have together paid the Treasury about $246 billion in
dividends.
There is precedent for broad use of penalties. Funds from a 1998
deal for tobacco companies to pay states an estimated $200 billion
over 25 years, intended to help states pay for smoking-related
health costs, have also been used to balance state budgets and to
fund school reading programs, after-school services and
infrastructure.
A Justice Department spokesman, Patrick Rodenbush, said the bank
settlements "hold financial institutions accountable for various
forms of fraud in the mortgage industry" and that the money
compensated "government agencies and programs harmed by the banks'
conduct."
In three major settlements analyzed by the Journal -- $13
billion from J.P. Morgan Chase, $7 billion from Citigroup and the
$16.65 billion from Bank of America -- banks were censured for
misleading investors about shoddy mortgage securities. The Justice
Department played the lead role in doling out pieces to other
agencies and states involved in the litigation, according to people
involved in the lawsuits.
Seven states, most with attorneys general who played important
roles in previous litigation against the banks, participated
directly in those settlements and received funds for special
projects and local residents.
In New York, Gov. Andrew Cuomo is using proceeds to help replace
the Tappan Zee Bridge north of New York City, renovate the Port of
Albany and provide high-speed Internet access in rural
communities.
Last year, when Mr. Cuomo announced in a speech that the New
York state fair would get $50 million for an overhaul, Troy
Waffner, the acting director of the fair, jumped up and down and
called his mother. The fair will use the funds for improvements
like a bigger concert stage, making the grounds more accessible to
the disabled and an equestrian facility with warm-water washing
stations for the horses.
Some New York housing advocates said more money should have been
directed to areas directly affected by the financial crisis. Mr.
Waffner is among those who support a broader distribution. "The
more money we can invest in bringing back the economy. . .I don't
think that's a bad use of funds," he said.
Gov. Cuomo's office said his own $20 billion, five-year
investment in affordable housing, homeless services and related
programs, "far exceeds what the state has collected from financial
settlements," said Morris Peters, a spokesman for Mr. Cuomo's
budget office.
Most states have directed settlement funds to state pension
plans, which oversee savings accounts for public employees such as
teachers, judges and other government workers. Many of those funds
had invested in mortgage securities that went sour during the
crisis. California sent the bulk of its $700 million in bank
penalties to its two biggest statepension funds. The office of
state Attorney General Kamala Harris said it held back $28 million
for itself "to support this and related litigation."
Out of the $110 billion in settlements, the Justice Department
retained at least $447 million, the Journal's analysis showed. The
department keeps up to 3% of most civil fines collected, in its
Three Percent Fund. It isn't required to disclose how much money it
puts in the fund or how it is spent.
Last year, a report by the Government Accountability Office, the
investigative arm of Congress, estimated the Three Percent Fund
collected $158 million from all eligible civil fines in fiscal
2013.
Diana Maurer, a GAO director, said her office believes the
Justice Department should develop better plans for the use of the
Three Percent Fund. The Justice Department countered, according to
Ms. Maurer, and said it wanted to avoid creating improper
incentives for prosecutors.
"They did not want to plan out" the spending for the long term,
Ms. Maurer said. "And we said, 'No, you really should, this is
hundreds of millions of dollars.' "
The Justice Department didn't comment on the use of the
fund.
Banks agreed to provide an estimated $45 billion from the
settlements in the form of consumer relief.
(MORE TO FOLLOW) Dow Jones Newswires
March 10, 2016 02:48 ET (07:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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