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Bank Fines: The Cost of Doing Business

Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investor response to the Libor interest rate fixing scandal must have perplexed Wall Street.  There was no great outpouring of outrage, or mobs of investors grabbing torches to burn down the exchanges.  In fact, both investors and the general public really didn’t seem to care about it one way or the other.

Bank regulators and politicians naturally took center stage, expressing the required outrage and shock while demanding answers and promising reform.  Of course, they also downplayed that as early as June 2008, former president of the Federal Reserve Bank of New York Timothy Geithner had sent an email to the Bank of England warning them of potential Libor interest rate setting irregularities. 

The bankers that smile and shake your hand when you open an account are the same ones that have been fined over and over for “irregularities.”  A brief look at 2012 seems to indicate that government and regulatory fines are viewed as little more than another cost of doing business.

In January 2012, Morgan Stanley (NYSE: MS) started the new year with a $4.8 million fine for rigging wholesale electricity prices through complicated derivative swaps in New York.  The fine was only a small dent in the $21.6 million profit Morgan Stanley made from these activities. In February 2012 under an agreement with the Fed, big banks were fined over $700 million for problems with their mortgage servicing activities, including the infamous robo-signing of unread foreclosure documents.  Bank of America (NYSE: BAC) was fined $175.5 million, Citibank (NYSE: C) ponied up $22 million, JP Morgan Chase (NYSE: JPM) paid a whopping $275 million, Wells Fargo Bank (NYSE: WFC) paid $87 million, and Ally Bank paid $207 million.

Fining financial institutions for breaking the rules is a mere slap on the wrist that has done little to stop these activities.  So what’s to do?  The United Kingdom, more than a little embarrassed at Libor, is considering making serious misconduct, which would include negligence, incompetent or reckless actions on the part of banking officials, criminal offenses.  They’re also looking at whether a former official of a failed bank should be allowed to hold high positions in the finance industry again.

But would the threat of possible jail time be enough to curtail financial misconduct?  And do banking officials even care?  Shareholders certainly don’t.  It hasn’t been raised as an issue at any recent stockholders meetings – so long as the company posts a profit.  Shareholders don’t seem to mind the millions of dollars being paid out in unending fines if the company makes money and dividends are paid on time.

It’s a culture of indifference that’s not expected to change short of a major financial disaster.  Government agencies slap wrists and collect fines while bankers laugh it off and move on to the next deal.  Shareholder outrage surfaces when profits fall or dividend payments are missed. Would criminal sanctions be enough to turn this climate of indifference around?  The way the United Kingdom handles the Libor scandal will send a clear signal that bankers will either be held criminally responsible and prosecuted for their financial offenses, or scolded, fined and sent on their merry way.     


kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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