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The $110 Billion Bank Robbery

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If you want to get money from a bank to build a new house, you better have top-notch credit and a stack of documents to prove everything from your income to your existence.

But if you want bank money to build a new horse barn at your state fairgrounds, just call your governor.

A recent Wall Street Journal analysis sought to determine where the $110 billion in fines relating to the housing crisis went. The aforementioned horse barn for the New York State Fair was one example; email accounts for Delaware police officers was another. But just under half of the money vanished into the Treasury Department, where it was spent on… something.

The Journal found that out of the $110 billion, the Treasury Department received almost $49 billion. The Justice Department, whose prosecutors were largely in charge of negotiating the bank penalties in the first place, got at least $447 million; state governments collectively received more than $5.3 billion. In almost all of these cases, how officials spend the money “isn’t specified.” The money sank into general government funds, undifferentiated from any other sources of revenue and ready to hand out to any project officials care to fund. Granted, the spending has to be on activities authorized by law, but such authorizations are typically broad and vague. In today’s world, any money in government hands quickly finds an outlet, whether worthy or not.

About a year ago, I wrote about the effective nationalization of America’s banks. Given the intrusive methods by which regulators effectively inserted themselves into boardroom seats, the settlements could be better viewed as payments to the banks’ new owners. Consider the Federal Reserve’s decision to increase the “leverage ratio,” requiring American banks to maintain levels of capital well above the global minimum on all assets. Predictably, this has led banks to shun any but the most profitable or least risky business.

Banks recognized that that the government had both the means and the political incentives to shut them down outright if they didn’t pay up. This threat was the foundation on which the transfer of money from bank shareholders to unaccountable government officials was built. As for the shareholders themselves, they had little recourse, due to the sweeping powers given to regulators by the Dodd-Frank legislation.

The result has been what any economist would predict: both scarcity and misallocation of capital.

If you are a business, you cannot get a loan without putting up collateral. (Good luck if your business’ assets are mainly intangible.) But if you are a community advocacy organization with even the most tenuous relationship to the housing industry, that $110 billion is an ongoing source of money to be tapped, as long as you have made the right political contacts.

This is doubly true because the largest chunk of the penalties that did not vanish into government coffers went to consumer relief. Some of this relief took the form of modifying existing mortgages and making loans to low-income borrowers, though not to all or even the most deserving; getting relief was largely a matter of perseverance, connections and dumb luck. Another slice of the money went to politically active housing advocacy organizations, to do heaven-knows-what with.

Regulators have made sure that banks are incredibly wary of carrying out the normal business of banking, while also ensuring that money continues to flow to politically approved destinations.

This is why the recovery has continued to limp along at 2 percent growth. And it is among the reasons that companies are hesitant to expand. As long as banks have regulators hovering over their shoulders, ready to extract more financial penance for any real or perceived professional mistake, you can’t have normal economic conditions. Financial growth depends on risk management, not total risk avoidance. That’s another thing that got lifted from the banks in the $110 billion regulatory heist.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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