United States: Banks prosecuted, but bankers free

Monday, September 1, 2014

According to John Kenneth Galbraith, the economist who chronicled the Great Crash of 1929, the Great Depression did not actually end. Rather, it was swept away by World War II.

Something eerily similar seems to be happening with the global economy since the onset of the global financial crisis (GFC) six years ago.

The vice-chairperson of the US Federal Reserve, Stanley Fischer, said: “The global recovery has been disappointing … year after year we have had to explain from mid-year why the global growth rate has been lower than predicted as little as two quarters back.”

The GFC had its origins in the US when interest rates fell from 6% in January 2001 to 1% in mid-2003. This led banks and other financial institutions awash with cheap money to conclude that lending to home buyers at risk of being unable to afford their repayments was a safe bet.

By 2005, 43% of first home buyers paid no deposit on their purchases. The median first-time buyer entered the housing market with a deposit of just 2% of the house sale price.

Two years later, sub-prime lending had risen from 3% of US residential mortgages to 15%. The home loan portfolio of one of the larger predatory lenders, Countrywide Financial, went from $US62 billion to $463 billion in the four years to 2006.

Bank of America bought Countrywide Financial. It has just agreed to pay $17 billion to settle charges laid by the US government that it sold flawed mortgage securities in the period leading up to the GFC in 2008.

Bank of America is one of six US banks who, between them, have agreed to pay almost $127 billion to settle various cases relating to their dodgy lending practices that led to the GFC.

Banks are, of course, corporations. That is to say, under US law, they are artificial legal persons that have an existence in law independent of the persons who comprise the corporation (the corporators). Corporations are liable criminally for the acts of their employees.

But it was not banks as artificial legal identities that devised these scams. It was the corporators ・ individual bankers and those in their employ doing their bidding.

The $17 billion payout by Bank of America is the largest settlement ever reached with a single company in the US. However, it still leaves those individuals responsible untouched and free to go about their nefarious business.

Until these bank bandits are called to account, any abatement of the continuing crisis will only be followed by a repeat of it.

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From GLW issue 1023