Huge Wall Street Fines Raise Calls for More Transparency

The simple truth is that no one really knows where most of the money goes.

As the penalties levied by the U.S. government on big Wall Street banks charged with all manner of fraud tied to the 2008 financial crisis soars toward $100 billion, an obvious question that’s been asked again and again is: “Where does all that money go?”

The short answer is that most of it goes to the Treasury Department, where it disappears into the great maw of the federal budget, helping to pay down U.S. debt and offset an array of unspecified government expenditures.

It’s the “unspecified” part that bothers people.

“When this money is obtained (through settlements), where it goes, what it’s used for, how it’s dealt with is something most members of the public would want to know and should be told,” said former Securities and Exchange Commission Chairman Harvey Pitt.

“I would have a hard time being critical of more transparency,” Pitt added. “It ought to be possible for the Treasury to report on what it does with the money given the amounts in question.”

Eighty-five billion dollars and counting, according to figures compiled by SNL Financial. That’s the amount the six largest U.S. bank holding companies paid between 2010 and 2013 in settlements with federal regulators to resolve cases that contributed to the economic meltdown six years ago.

J.P. Morgan’s (NYSE:JPM) record-breaking $13 billion settlement last year for allegedly packaging and selling toxic mortgage-backed securities in the run up to the crisis set a new standard for government-negotiated penalties. But that number could be eclipsed any day by a deal currently in the works between the Department of Justice and Bank of America (NYSE:BAC), one that reportedly would have the bank pay $17 billion to settle fraud allegations also tied to sales of toxic mortgage-backed securities.

Settlement Money “Subject to Normal Political Decisions”

Of course, not all of the money in these settlements is funneled directly into the government’s coffers. Some of it -- $4 billion, in the case of JPMorgan’s deal -- is earmarked for restitution to investors and homeowners harmed by the alleged frauds.

But most of the money is earmarked directly to the Treasury. The SEC, for example, notes on its web site that it had collected $3.02 billion in penalties and disgorgements as of December 2013 from enforcements tied to the financial crisis, the lion’s share of that going straight to the Treasury.

Pitt explained that in the SEC’s case, as part of legislation pushed by Pitt that was included in the Sarbanes-Oxley banking reform act passed in 2002, money collected from fines can be placed in what are known as Fair Funds created specifically to pay back investors damaged by frauds. Prior to 2002 all fines paid to the SEC went directly to the Treasury.

All penalties paid to the DOJ, however, are turned over to the Treasury unless a special provision is written into the settlement and approved by a judge. “The use of that money is then subject to the normal political decisions that are made in Washington,” said Pitt.

That’s where the issue grows contentious.

Duke University law professor James Cox, an expert in corporate and securities regulation, is a critic of the “mega-settlements” and how the fines from those settlements are disbursed.

“The public knows as much about where that money goes as they do where their tax dollars go,” he said.

Cox explained that once the money is transferred to the Treasury it’s equally divided among all the line-item expenditures in the federal budget. Since the budget doesn’t always cover all of the government’s expenditures in any given year, the end result is that the fines help reduce the amount the federal government has to borrow to cover their expenditures.

“It’s Not Very Transparent”

That aspect benefits taxpayers, Cox acknowledged, but added, “it’s not very transparent.”

A Treasury Department spokesman cited the federal Miscellaneous Receipts statute, saying the law broadly requires that “all receipts of the government are to be promptly deposited into the Treasury General Fund unless otherwise provided for by law.”

So unless the law is changed, it seems the Treasury Department isn’t required to be any more specific than that about where the money goes after it’s deposited into the general fund.

In any case, Cox said he doesn’t believe it would make much of a difference if the government was to create a separate pool for Wall Street penalty funds that might, for instance, ostensibly be earmarked for beefing up the regulatory agencies that police Wall Street.

Members of Congress would probably find a way to divert the money to causes of their choice. “It’s the old shell game,” said Cox, “money is fungible.”

Cox also questioned whether the huge fines are a deterrent. “We’ve made violating the law part of the cost of doing business. It tells you how profitable these businesses are that they can write these checks and still remain highly profitable,” he said.

Pitt said the amounts of money exchanging hands between Wall Street firms and the U.S. government increases the need for more transparency.

“In the old days, the amounts were miniscule. But today, with the numbers we’re seeing, this is very serious money. Without people knowing what it’s used for a multitude of sins can be buried,” he said.

And, while it might make life more difficult for Treasury Department accountants, Pitt said it’s certainly achievable.

“To my way of thinking, this is something people ought to know about and have a right to know about. The only thing complicated about this is the reason we’re not knowing about it,” he said.