Three years ago this week, the financial system came unhinged. In rapid-fire succession, one major financial institution after another crumpled as years of recklessness on Wall Street and regulatory neglect in Washington took their toll. Before it was over, the federal government had committed trillions of dollars to bail out the nation's largest banks and the economy was in tatters, with gnawing questions remaining about what went wrong and who was responsible.
The unraveling had dire consequences. Twenty-four million Americans are unemployed or unable to find full-time work, with wages as a share of gross domestic product at the lowest level since the 1930s. Meanwhile, the banks barely skipped a beat, with compensation at publicly traded Wall Street firms reaching a record $135 billion in 2010.
Sadly, there has been too little progress in fixing our financial system so that it works for all Americans, not just the titans of finance, and few consequences for those who drove our economy off a cliff.
To date, we have seen few criminal prosecutions and too many civil enforcement cases settled for pennies on the dollar with no admission of wrongdoing. Yet, buttressed by the investigations of the Financial Crisis Inquiry Commission, the Senate Permanent Subcommittee on Investigations, and various enforcement agencies, there is now a rising tide of legal actions seeking redress from banks that acted improperly.
The states' attorneys general are pursuing claims against banks for their "robo-signing" of court affidavits in foreclosures and for servicing abuses against homeowners seeking to modify their loans. That effort could bring a settlement of $20 billion and reforms of bank practices.
The Federal Housing Finance Agency has sued 18 banks for misleading Fannie Mae and Freddie Mac about risky loans in mortgage securities that the banks sold to those entities, resulting in more than $30 billion in losses.
The Federal Housing Administration is suing Deutsche Bank for recklessly approving 39,000 mortgages for government insurance, in blatant disregard of whether borrowers could pay back the loans.
And investors have launched a barrage of litigation against banks for their actions in selling them risky mortgage securities that quickly soured. These actions hold out the possibility of recompense and reform in the wake of disturbing breaches of ethics. Yet, the path to successful conclusion is by no means certain.
The banks named in these lawsuits will spare no expense in the legal fights ahead. After all, they spent nearly $52 million in the first quarter of this year just on federal lobbying to protect their interests. The banks are reportedly demanding that any settlement come with a broad release for wrongdoing in originating, packaging and selling the disastrous mortgages at the heart of the financial collapse.
Perhaps most troubling is a growing chorus in the financial arena suggesting that holding the banks responsible might sink the banks and the financial system. These concerns are misplaced. The 10 biggest publicly traded U.S. banks have tangible common shareholder equity of more than $600 billion, with the regulators able to require more if needed. Their profits topped $62 billion in 2010. They are paying billions of dollars each year in dividends and gave out $464 million in collective compensation last year to the top five executives at each of those banks. In any event, money isn't the only remedy — reforms of corporate governance and bank practices can provide meaningful change.
It's critical that the banks not be given an unlimited pass for past transgressions — to ensure that the truth of what happened to our country is revealed and justice is not short-circuited.
Phil Angelides served as chairman of the Financial Crisis Inquiry Commission, which conducted the nation's official inquiry to the financial and economic crisis. © 2011 Sacramento Bee