At the Justice Department, senior officials like to congratulate themselves on the headline-making, big bucks settlements they have imposed upon banks and lenders for their part in causing the 2008 mortgage meltdown that sparked the biggest American financial crisis since the Great Depression.
But wait a moment. Those settlement figures are not quite what they seem. Buried deep in the announcements of the astronomical sums that Wall Street banks are being forced to pay is a dirty secret: A big chunk of the hundreds of billions of dollars banks have paid in settlements to various federal agencies and regulators since 2010 is deductible from the taxes banks and lenders pay.
When is a fine not a fine? When it can be put against your tax bill.
Because settlements can be deducted from tax liabilities, for nearly every dollar a bank or lender has pledged to pay in cash or pony up in other ways—such as through buying back soured mortgage-backed securities, extending cheaper loans or forgiving failed loans held by struggling homeowners—up to 35 cents will find its way back into bank coffers, a reflection of the 35 percent federal corporate tax rate.
Deep in the legalese weeds of the settlement documents lies buried treasure. Big banks such as Bank of America and JPMorgan Chase will receive deductions against the corporate tax that will amount to between half and nearly three-quarters of their multibillion-dollar settlements, at least. Meanwhile, midsized banks and nonbank lenders generally get to deduct the whole shebang.
Under Attorney General Eric Holder, whose agency has not prosecuted a single major bank or executive in the aftermath of the 2008 meltdown, the Justice Department has been criticized, not least by Democrats, for believing banks are too big to fail and their top brass too big to jail. But here’s the twist. It turns out that banks are also too big to tax: Windfall tax deductions set against the civil settlements imposed by the Justice Department total more than $44 billion, according to Newsweek estimates.
That’s a big sum. Yet it is not a figure the Justice Department appears aware of. In fact, the nation’s top law enforcement agency in charge of cracking down on perpetrators of the mortgage crisis says it has no clue exactly how much money and consumer-relief services the banks have agreed to hand over in settlements with the agency—or how much of a tax deduction the banks are getting through the settlement deals.
Asked by Newsweek the grand total of all mortgage-related settlements between the agency and banks and nonbank lenders since the 2008 crisis, an agency spokeswoman says, “A global figure? We just don’t have that.”