Volume 1
How to Rob a Bank

The USD 14 billion Deutsche Bank fine

When Deutsche Bank announced its 3rd quarter earnings for 2016 at EUR 278 million, representing a return on tangible equity of a measly 2 percent, the market counter-intuitively rallied. Clearly, investors must have already priced in an expected loss of EUR 350 million, predicted by a range of analysts. This would explain the stint of buying that was observed on the exchanges during the days following the results. Still, though, it is remarkable that a return on equity far below any acceptable threshold is now – as the Financial Times has put it – the new normal. Given the announcements in September 2016 that the US Department of Justice would levy a fine against Deutsche of USD 14 billion for market misconduct during the Financial Crisis of 2007 and 2008, investors breathed a metaphorical sigh of relief that Deutsche could eke out a profit at all in the 3rd quarter.

When John Cryan started at Deutsche Bank as CEO in mid-2015, after taking over from Anshu Jain and Jürgen Fitschen – the ex co-chief executives of the Bank who had both left under a cloud – he surely did not expect his job descriptions to include desperately flying between Frankfurt and New York to negotiate more reasonable terms with the Department of Justice. Nor did he expect to be selling off assets such as Deutsche Bank’s stake in the Chinese bank, Hua Xia, or in Red Rocks Resorts, a gambling and entertainment conglomerate, under fire-sale conditions. Or, for that matter, the sale of any asset at any price to avoid the ignominy of having to appeal to the German taxpayer to shore up the bank’s capital reserves to avoid technical failure.

To be clear, what may have been going through John Cryan’s mind whilst crossing the Atlantic at 40 000 feet on his way to yet another grilling with Department of Justice officials, was probably the fact that Jain and Fitschen were let go from Deutsche only a month after unveiling a strategic plan to improve shareholder return – at the time a paltry 2.7 percent for the 2014 year end. Their undoing had been the USD 2.5 billion fine for LIBOR manipulation, skewering even the best laid plans. The alleged transgression for which Deutsche was now apparently culpable, and for which the Department of Justice wished to levy a staggering USD 14 billion fine, is a figure five times larger than the LIBOR rigging fine. At the time, during September 2016, that value almost approximated the total market capitalisation of Deutsche Bank as a whole. Subsequently, the fine as it stands at USD 14 billion, which Cryan has stated he vehemently opposes, substantially exceeds the market value of the Bank, which has recently dipped below USD 10 billion.


Payback for the European Parliament’s Claw-back of Apple’s Unpaid Tax

The alleged transgressions with which the Department of Justice finds fault: ‘market misconduct’ in the sale of mortgage-backed securities during and before the Financial Crisis of 2007 and 2008 – that is, over nine years ago. It is also particularly telling that very little detail has yet to emerge as to how the figure of USD 14 billion was arrived at by the Department of Justice. Or, for that matter, why Deutsche Bank in particular, nine years after the fact, has been singled out. Cynical observers have pointed out that the Department of Justice market misconduct fine follows closely in the wake of the European Union’s attack on Apple, specifically the European Parliament’s desire to claw back in excess of USD 14.5 billion in ‘unpaid taxes’.

Apple, like many other Silicon Valley giants, has made extensive use of Ireland for tax inversion purposes. This is where a firm relocates its legal domicile to a lower-tax nation, whilst retaining its material operations in its home nation. To be clear, whilst tax inversion is a common corporate strategy for reducing tax liabilities, Apple’s story does push the boundaries of reasonable ethical behaviour. The corporate tax rate in Ireland is 12.5 percent and the effective rate of tax that Apple paid last year – the world’s largest and the most profitable company ever – was 0.005 percent of earnings. Should one occupy the cynical view, then it is easy to conclude that the Deutsche Bank fine is simply a US political reaction to the European Parliament’s tax claims against Apple.

There is a distinction to be made however. Whereas the figure of USD 14 billion that the Department of Justice has decided to fine Deutsche Bank has very little basis in factual losses incurred by taxpayers, investors, or homeowners, the claim by the European Parliament against Apple is based on an actual ‘unpaid tax’ amount – based on the Irish tax rate itself. Irrespective of whether one agrees with Apple’s tax attorneys or not, and irrespective of whether one agrees with the ethics of tax structuring, it is difficult to argue with the position occupied by the European Union in which a hypothetical Apple entity earning USD 1 million pays USD 50 in tax. Should a firm earning more than USD 50 billion in profit per year pay almost no tax? Certainly, in the world of politics, the European Parliament threw the first punch, but the United States has returned the favour by throwing bricks through windows.

All of this leads one naturally to the following question: in a world in which banks are far more restricted in terms of how they are able to make money and far more prone to government intervention – think here of increased capital requirements, depressed yield curves, reams and reams of regulations, restrictions on bonuses, criminal charges for misconduct, and tax collection legislation such as FATCA (Foreign Account Tax Compliance Act) – is there any real incentive left for investors to take value-based investment positions in this industry?

On top of these structural impediments to the industry, it would seem that the fines levied against banks are now orders of magnitude larger and more stringent than ever before. In fact, with Deutsche Bank as an example, should the Department of Justice’s position prevail, the USD 14 billion fine would wipe the bank out, plain and simple. Either the German taxpayer would have to pay up – possibly ending Angela Merkel’s tenuous position as Chancellor – or Deutsche Bank would have to go into the equivalent of receivership.

Think of the effect that Lehman’s failure had on the market – a far smaller, far less connected institution – and the effect that a Deutsche Bank failure could have become almost unconscionable.


The Origins of the Monocle Fines Database

If, then, this latest fine is of a political nature – at least to some extent and if it is as dangerous as it seems, then why would the Department of Justice be unconscious to the broader geopolitical and economic risks? The answer to some degree lies in the phrase the Financial Times Lex columnist uses in respect of Deutsche Bank’s latest earnings report “it is the new normal”. As data will elicit, it has become reasonably commonplace to fine banks in the order of billions of dollars. To properly consider the extent to which fines against banks have become blood-sport in international and regional politics, and in order to measure the extent to which these fines have steadily eroded the ability for banks to maintain their status as independent private sector entities, one has to properly examine the full history of banking fines levied globally since the advent of the Financial Crisis of 2007 and 2008. Oddly, other than certain studies conducted by the Financial Times itself – who seem to keep a database of fines as they are levied – there would appear to be a dearth of structured information in a single dataset from which to analyse the phenomenon of government fines against banks. As such, the Monocle Research Team made a decision in early 2016 to begin to collect data in respect of banking fines globally.

A few preliminary remarks need to be made before the data that was collected can be analysed. Firstly, the Monocle Research Team made the decision to restrict the database to fines levied against parent bank entities domiciled within G8 countries, and levied by legislative institutions themselves domiciled within G8 countries. This meant that fines levied against Chinese banks, as an example, would not be considered, nor for that matter against Norwegian or Icelandic banks. It would also mean that fines levied against US banks by Chinese authorities would not be considered either.

The rationale behind this call was not random or convenient but was based rather on the observation we had made somewhat subjectively that very little information is available in respect of non-G8 domiciled regulatory or legislative organisations levying fines against banks whatsoever. It would appear that the US authorities have a hands-off approach to Chinese banks, and that Chinese authorities tend to have in tandem a hands-off approach – at least within the public domain – to US banks.

It is important to note that this is not a trivial point. In the latest Fortune 500 list of the largest private firms on earth, the most profitable company worldwide was Apple, with a profit in excess of USD 50 billion. The next four most profitable companies listed are all Chinese banks, none of which seem to have been fined for any transgression at all over the past decade. In contrast, as shall be examined below, the four largest US banks have experienced the deleterious effects of significant fines from a number of Federal and State organs over the past decade, often of such magnitude as to substantially erode profits and capital.

Rather than examining this question of geopolitical preference subjectively, we made the decision to limit the study and the construction of the fines database to countries that have a long history of responsible financial and risk reporting standards in order to create a database of greater accuracy. We settled upon the G8 as the logical starting point of the study.

Secondly, we decided to limit the study to individual bank fine events that constituted fines of greater than USD 1 million in value. Throughout the G8 countries, banking institutions, as well as corporations from several other industries, are regularly fined for indiscretions at an individual customer level, for values far below USD 1 million. This would be true for example within the telecommunications industry, for small indiscretions such as incorrect billing or for not maintaining and updating personal information. These issues are usually resolved by an industry ombudsman and are commonplace. We believed that the key insights that we wished to observe would not be contained within this level of detail, and that the database would be sufficiently indicative rather than complete if we were simply to create a lower bound threshold.

Thirdly and finally – as an introductory point – we made the decision to only include fines that we could validate from pure source material. The Financial Times, as an example, has on several occasions published results based on their own research and database. It was extremely useful to make reference to this dataset, but we insisted internally that all fines data should be backed up by source material from either the fined entity or from the regulator or legislator itself.

As an example, we made a thorough study of the Department of Justice document detailing the misconduct of Bank of America in their malfeasance in misleading customers through its Countrywide subsidiary in terms of selling mortgages irresponsibly. We needed to fully digest the legal documentation in its entirety so that we could accurately capture precisely which laws had been broken, as well as precisely where the money from the fines would be allocated. Often this involved reading and summarising detailed legal documentation and breaking the headline- capturing staggering fine value into smaller amounts and accruing these amounts to the various Federal and State entities that participated in the actions against the bank.

Ultimately, the database elicited in excess of USD 138 billion in   fines levied by G8 countries against G8-domiciled banks between the beginning of 2007 and the end of 2015. This figure closely aligns with the information that can be garnered from the Financial Times database, which gave some comfort in terms of the overall magnitude of the values.

It is important to note that all fines levied or proposed since the 1st of January 2016 are excluded from the Monocle Research Team database, and would therefore naturally exclude the fine to be negotiated between the Department of Justice and Deutsche Bank. Undoubtedly there will be more fines to come this year – perhaps a significant fine against Wells Fargo after the recent debacle concerning the discovery of several million fake accounts they set up in a cross-selling initiative that led to the ignoble and sudden resignation of their CEO in October.


Key Conclusions Drawn from the Fines Database

The first conclusion that can be drawn from the database of fines is that G8 authorities took an aggressive and stringent position against G8 banks after the Financial Crisis of 2007 and 2008, but oddly with a delay effect of 4 to 5 years subsequent to the crisis itself.

Of the total fines in the Monocle database amounting to USD 138 billion – levied between the beginning of 2007 and the end of 2015 – over 95 percent were levied from the beginning of 2012 onwards. If one excludes the years of 2007 and 2008 – given that the crisis itself was underway and that regulators at the time would have been more concerned with saving the banks than fining them – the numbers are even more surprising.

In the three years from 2009 onwards, a total of USD 6.36 billion in fines were levied, whereas in the three years from 2012 onwards, a total of USD 120.1 billion in fines were levied. That represents a 1788 percent increase in G8 fines levied against G8 banks over three years.

There are arguments that can be made that regulators and macro prudential authorities needed time to fully understand the causes of the crisis, and thereby to apportion blame, and that that took several years. However, a far more likely argument – whilst somewhat speculative – is that the world of banking and the manner in which it is treated by G8 governments, but particularly by the United States government, changed forever after the London Whale USD 2 billion loss.


The London Whale and Losing a Seat at the Negotiating Table

In May of 2012, JP Morgan announced losses in excess of USD 2 billion relating to derivative trading positions. This was soon revised to losses that could exceed USD 9 billion under worst-case scenarios. As it happens, the actual loss that JP Morgan incurred in what is known as the “London Whale” trade is somewhat intractable to calculate, owing to the egregious fact that certain of the trading positions that they held in different units within the bank actually cancel out portions of their losses. It is estimated that the total loss was of the order of USD 6 billion.

The notion of losing money through complex derivative trading positions was at the time not necessarily worthy of regulatory attention. It was rather the size of the losses on positions taken in complex credit default swaps (CDS), as well as the sources of the positions that drew regulatory attention.

A trader by the name of Bruno Iksil, who later earned the illustrious nickname “The London Whale”, had taken the initial oversized CDS positions. What was most disturbing about the trades is that they were not taken by a Nick Leeson-type rogue trader, sitting in an office in Singapore. They were enormous risky bets taken by a trader reporting directly into the Chief Investment Office (CIO), which itself reported directly into Jamie Dimon, the CEO of the bank. The mandate of the CIO unit included “faithfully executing strategies demanded by the bank’s risk management model”.

To fully understand the extent to which this unit traded positions that did not enhance risk management within the bank to any degree at all, one needs to look at the trades themselves. Iksil had basically taken an enormous market-moving bet that the spread between LIBOR (London Interbank Offered Rate) and the implied yield of investment-grade corporate debt – based on the price at which listed corporate debt traded on the market – would narrow.

LIBOR is the rate at which banks will lend to each other within the interbank market, and it is generally a rate that does not take cognisance of any credit risk spread. Corporate debt – even corporate debt of the highest investment-grade standards – usually has embedded in its rate (or what is known as its yield) a basis-point credit spread to compensate investors for taking on the risk that the corporation itself may default on its bond obligations.

In order to take this bet Iksil took significant volume positions in some- thing called CDX IG 9 – known to market-savvy investors as the Markit CDX North America Investment Grade Series 9 10-Year Index. This index is made up of the yields of 121 investment-grade bonds issued by North American corporations, and is measured as a spread against LIBOR.

The higher the value of the index, the greater the spread, usually associated with market unease, such as political uncertainty or economic uncertainty. During periods of market unease, there is usually associated a flight to quality, and demand for US corporate debt – as opposed to government debt – should weaken. This should lead to lower demand for US corporate bonds, lower prices, and inversely higher yields for these same bonds. The index would then increase in value during periods of severe turmoil and decrease in value during periods of relative calm.

By taking enormous volumes of short (sell) positions in the CDX IG 9 index, Iksil had essentially made a very large bet that markets would strengthen and these spreads would narrow. He had taken these positions unhedged. His bet was essentially precisely that: no more and no less than a bet one would make at a roulette table in a casino.

Had the trading positions been of a nature that would correspond to the idea of executing trades to support risk management within JP Morgan as a whole, there would have been corresponding positions in the bank in the opposite direction – that is, positions that assumed market disruption which the CIO unit felt it had to hedge out. Ironically as it happened and tellingly in terms of the failure of risk aggregation – other units within the bank had taken the opposite view and had taken opposite positions. This had occurred unbeknownst to Iksil, and certainly not for hedging purposes, but rather because they felt that the market-moving positions taken by other traders – including their own firm’s other traders were wrong.

As with Nick Leeson, it was unexpected market events that blew up the short positions Iksil had taken. In Nick Leeson’s case his ‘straddle’ trade on the Nikkei 225 – in which one earns fees for selling short positions and long positions at the same strike price on the same index with the view that the market will remain stable – was blown up by the news of the Kobe earthquake and its ripple effect across the entirety of the Japanese markets.

In Iksil’s case as well, the markets reacted as they had never done before, owing to externalities he could not have predicted. The global markets in April and May of 2012 had become increasingly concerned that the European economic crisis had taken on a new face; that it was possible now to conceive of a Greek default, and possibly worse – a ripple effect of economic failure throughout Europe. Investors – with the dexterity that has become the bane of financial markets – took money out of the corporate bond market in a flight to safety. This decreased demand for US bonds pushed US corporate bond prices down, increasing their yields, and widening the aggregate yield spread against LIBOR. This led to an increase in the CDX IG 9 index price, and this – coupled with several large hedge funds deliberately taking the opposite position to JP Morgan’s insanely large short positions on this trade – led to previously unheard of trading losses in JP Morgan’s CIO unit.

To make matters even worse, the CIO unit, it turned out during Congressional hearings, reported directly to Jamie Dimon himself, the CEO at the time and the CEO to this day. In testimony it was revealed – depending on one’s perspective – that Dimon had insisted on this direct report of the CIO unit so that he could choose and manage the information being revealed publicly and that information may have been deliberately withheld from investigators. Dimon at the time, along with Lloyd Blankfein, CEO of Goldman Sachs, and Vikram Pandit, CEO of Citigroup, had been the most vocal of critics of the anti-Wall Street and anti-banking agenda.

JP Morgan had fared pretty well through the Financial Crisis, and Dimon was a significant voice of opposition against excessive intervention into the banking industry. That argument – between the laissez-faire capitalist agenda and the angered public who believed banks were entirely at fault for the crisis – was in some form of balance before the London Whale trade. The position Dimon held as flag-bearer for the independence  of banking was eliminated completely after a series of Congressional hearings that revealed that the CIO unit’s “judgement and execution... were poor”, that the bank “did not ensure that the controls and oversight of CIO evolved commensurately with the increased complexity and risks of certain CIO activities”, and that “CIO risk management was ineffective in dealing with synthetic credit portfolio”.


President Obama and JP Morgan

Dimon himself admitted that “egregious mistakes” had been made in trading these positions. Up until the point at which the London Whale trade occurred, Dimon had a strong position at the negotiating table with macro-prudential organs of State, as well as with local regulators. No less than Barack Obama himself, president of the United States and one of the greatest advocates of reining in greed on Wall Street in the last one hundred years, came out in defence of Jamie Dimon after Whoopi Goldberg had publicly questioned Dimon’s ethics after the London Whale incident. Obama is quoted as saying “First of all, JP Morgan is one of the best managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we’ve got”.

This was not the first time Obama had publicly stood up and made presidential statements in support of Jamie Dimon. Following JP Morgan’s disastrous decision to acquire Washington Mutual just prior to the Financial Crisis, Obama made the following public statement: “You know, keep in mind, though there are a lot of banks that are actually pretty well managed, JP Morgan being a good example, Jamie Dimon, the CEO there, I don’t think should be punished for doing a pretty good job managing an enormous portfolio.”

Irrespective, however, of the politics imbedded in special interests within Wall Street, and irrespective of the tight-knit relationship between Wall Street and both the Democratic and Republican parties, the 2012 London Whale event was a turning point following which regulators, investigators, Attorney Generals and prosecutors seem to have had carte blanche in their willingness to punish banks.

In the four years from the start of 2012 through to the close of 2015, JP Morgan was fined, by the Department of Justice, by the Board of Governors of the Federal Reserve, by the Treasurer of the United States, by the States of California, Delaware, Illinois, Massachusetts and New York, and by many other extensions of government, a total amount in excess of USD 29.6 billion. This represents – based on JP Morgan’s financial statements for the four years ending 31 December 2015 – an annual of 26.4 percent of after-tax earnings.

This means that should JP Morgan have wished to reward shareholders over the past four years with dividends, they would have had to do so only after eroding more than a quarter of their net profit after tax to simply pay fines. Equally deleterious to investors is the fact that this same USD 29.6 billion could have been used to shore up Tier-1 core capital a Basel III requirement that has effectively nearly doubled required regulatory capital since 2008.

To put this problem of capital into perspective: on average, over the past four completed financial years, fines have eroded 4.6 percent of JP Morgan’s Tier-1 capital. In a world in which returns on equity within the banking industry are below 10 percent, it has become increasingly difficult to raise capital within banking. This is especially true when even profitable banks are unable to effectively retain earnings and reward shareholders, since either fines, or the rules of stress testing, prevent them from doing so. To be clear, under bank stress testing rules within the US but not within bank stress testing rules in Europe – failure to prove that a bank’s balance sheet has sufficient capital to absorb hypothetical market disruptions leads to a ban on any dividend payouts.

One should not necessarily shed a tear for JP Morgan specifically however, since they are by no means the only firm to have been impacted by the significant shift in attitude in the middle of 2012 by regulators and governments both in the US and Europe.


Massive Fines Levied Against Bank of America

Bank of America as an example, over the same four-year period, was fined a total amount of USD 43.1 billion. In 2012, Bank of America made a loss, meaning that a comparative ratio of fines levied versus net profit after tax yields a negative value and is superfluous analytically. However, for the three years starting January 2013, through to 31 December 2015, Bank of America did make profits, and was fined an incredible average of 94.2 percent of these profits. To be clear, these ratios are calculated as the sum of levied fines for the year, divided by the firms’ reported net profit after tax. Any provisions made within the financial statements for the year in question would have been embedded within the profit before tax line item. Just in the year 2012, Bank of America was fined an eye-watering USD 12.4 billion. In 2014, Bank of America was fined in excess of USD 27 billion, or 167 percent of net profit after tax. In the four years from the beginning of 2012 onwards, Bank of America made a net income of USD 25.8 billion, and was fined more than this in one year alone.

An analysis of the 2014 fines levied against Bank of America reveals two major fine events. The first was a USD 9.3 billion fine levied on the 26th of March 2014 against them for misleading customers under an Act recently penned in 2008 called the Housing and Economic Recovery Act. The Federal Housing Finance Agency (FHFA) successfully prosecuted them under this Act and demanded the fine to be collected by Freddie Mac and Fannie Mae, to settle claims asserted by the FHFA Parties.

The second major fine event which Bank of America suffered occurred on the 21st of August 2014 and was a result of their acquisition of Countrywide Financial Corporation in the teeth of the crisis during 2008 somewhat under duress. Bank of America purchased Countrywide Financial Corporation for an amount of USD 4.1 billion. The fine levied against Bank of America was the result of a joint prosecution against their Countrywide subsidiary by a combination of the Department of Justice, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development.

Once again, the charge was written down to misleading customers during and leading up to the Financial Crisis. The total value of the fine was USD 16.67 billion, over four times the amount Bank of America paid for Countrywide only six years previously. Had Bank of America known that the two pieces of legislation that would be used in 2014  to successfully prosecute them under this enormous civil claim fine – namely the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the False Claims Act of 1863 – they may well have rethought their investment in the then already failing mortgage broking firm.

In terms of what is most important in banking – namely Tier-1 un- encumbered capital – Bank of America experienced an erosion of their core capital per year on average of 6.73 percent during the past four completed financial years. In 2014 alone, 16.7 percent of their core capital was extracted from the firm in fines, paid to a range of Federal and State regulators, as well as to ‘affected customers’.


Fines Levied Against Citigroup and Wells Fargo

Citigroup, another of the big four US lenders, made a more impressive profit after tax of USD 55.3 billion in the four years from the beginning of 2012. In relative terms they fared reasonably well compared to their peers, being fined only USD 15.2 billion over the same four-year period. The fines considered as a percentage of their Tier-1 capital were also less onerous than the experience of Bank of America – the annual fines constituting an annual average of only 2.59 percent of core capital. As with Bank of America, however, 2014 was a particularly bad year. Citigroup was fined a total of USD 8 billion in a year that they made USD 19.6 billion profit after tax.

In the case of Wells Fargo, the least fined of the big four US banks; the experience was far less deleterious to profits and capital. They were fined a total of only USD 9.5 billion over the four-year period from the beginning of 2012, and during the same period made a profit after tax of USD 117.4 billion.

Of course, 2016, a year not covered within the Monocle fines database, has been a bad year for Wells Fargo. Whereas in February 2014 they were named the world’s most valuable banking brand for the second year running, they are currently under investigation by the Securities and Exchange Commission in relation to their account sales practices.

In September 2016, they were fined USD 185 million – a pittance compared to the fines issued against their peers – for creating over 1.5 million checking and saving accounts and 500 thousand credit card accounts that its customers never authorised. The Office of the Comptroller of the Currency, the City and County of Los Angeles, as well as the Consumer Financial Protection Bureau were the primary complainants in a case in which the very business model which Wells Fargo was most admired for – namely incentivising employees to create new accounts – was the cause of their fraudulent practices.

Over 5300 employees were dismissed, shortly after the head of the department who ran the cross-selling practice, Carrie Tolstedt, had retired in July of 2016. She received the equivalent of USD 124.6 million in stock, options and restricted shares as a retirement package – a payout that has gone a long way to further damaging any argument in favour of cutting back on oversight in banking.

In the wake of the public outrage against the bank, and especially in   a political atmosphere in which both the Democratic and Republican candidates for presidency had taken a hard and unwavering stance against the banks, John Stumpf, Chairman and CEO and up to that point much admired in the industry, announced on October 12 that he too would retire. It will be interesting to observe in years to come whether any retrospective fines – like those levied against Wells Fargo’s competitors – will be forthcoming.


United States Banking in Comparison to the Rest of the World

If one looks at the largest four US lenders as a group, some fascinating conclusions can be made. Of the top 30 banks domiciled in G8 countries, the four largest US banks made just under a third of the total profits after tax made by all thirty.

In order of profitability for the four years from the start of 2012:  Wells Fargo, JP Morgan, Citigroup and Bank of America made USD 117 billion, USD 113 billion, USD 55 billion and USD 25 billion accumulated net profit after tax respectively. That makes a total of USD 310 billion and change.

During the same four-year financial period, the other 26 largest G8 domiciled banks made a total profit after tax of USD 630 billion. The most profitable four non-US lenders were, in order of profitability for the four-year period: HSBC Holdings, Mitsubishi UFJ Financial Group, Sberbank, and Mizuho Financial Group with net profit after tax for the period of USD 83 billion, USD 61 billion, USD 47 billion and USD 42 billion respectively.

This makes a total of USD 234 billion in accumulated profit versus the big four US banking accumulated profits of USD 310 billion. Whereas, however, over this four-year period, the US banks in consideration were fined a total amount of USD 97.5 billion – or in relative terms a staggering 31.4 percent of accumulated profits – the four non-US banks under consideration were only fined a total amount of USD 4.1 billion.

In relative terms this means that the four most profitable non-US banks over the past four financial years have been fined only 1.75 percent of their net profits after tax whilst US banks have been fined 31.4 percent of their net profit after tax.

It would clearly seem that any argument that the US authorities make use of newly penned banking legislation to mete out onerous fines against foreign banks is false, in spite of what Deutsche Bank executives and shareholders may claim. And it would also seem that in spite of the fact that the USD 14 billion fine currently being negotiated between the Department of Justice and Deutsche Bank, whilst being suspiciously similar in size and timing to the European Parliament tax claim against Apple, is not necessarily politically motivated.

If it is, it would seem to be a once-off occurrence, rather than a persistent and pernicious undermining of the institution of banking as a private enterprise as is evidenced in the United States. Certainly, Deutsche Bank must feel somewhat singled out, but they are joining an elite group of US banks that have, for the past four years, been attacked under one piece of legislation or another, by either Federal or State agencies or both.


The Rationale for Oppressing Free-Market Banking

One may ask what possible argument there could be against the disciplining of banks in the United States. After all, they did cause the most severe economic distress globally since the Great Depression. There are several responses to this. As a start: the banks were enabled to package mortgages and then to sell these packages as securities as investment-grade instruments through a combination of three socio-economic factors.

Firstly, politically, both Democrat and Republican leadership in the nineties and early 2000s had encouraged all Americans to own their own homes. This led to the advent of the aggressive mortgage broker such as Countrywide. Secondly, there was a complete failure of regulatory oversight. Think only of the Gramm, Leach, Bliley Act, which eroded the remnants of the Glass-Steagall Act. Recall that it was this Act that had successfully separated deposit-taking institutions from investment banks after the Great Depression. The Gramm, Leach, Bliley Act was pushed through Congress under the tutelage of Larry Summers, who called it the Financial Modernization Act, who was at the time an economic advisor to Bill Clinton.

Whilst banks have been severely punished, the politicians, economists and regulators who augured in the age of excess that led to the Financial Crisis have come out well in comparison. At worst they have had to endure some embarrassing responses during Congressional hearings. At best they have walked away with book deals and paid-for speaking slots.

Thirdly, an entire industry, including media houses that owned and to this day still own the rating agencies have gone relatively unsullied over the past decade. This is in spite of being the actual institutions that were most culpable for ensuring the quality of these toxic assets. There has been very little to no repercussions for the lack of prudence taken by these agencies and for their part in the crisis.

Nevertheless, in spite of the asymmetry in the regulatory and legislative response to the crisis, one is still left with the question as to what the purpose is of bringing the entire banking industry to its knees. It will become very difficult for banks to continue operating as truly private enterprises should the persistence of the state-led attacks on them continue unabated. Perhaps there are two reasons, however, that this will continue.

Firstly, the US economy is currently an USD 18 trillion economy. Collecting almost USD 100 billion in fines from only four banks over four years is not an insignificant boost to government tax receipts. The end game here may be to use bank fines to bolster the fiscus. The sheer size of these fines puts flesh to this argument. The second argument as to why the US would allow the erosion of one of their primary industries is far more pernicious. Banking, more so than any other industry, provides the keys to the kingdom. Were banks to become state-owned enterprises, or at least to become so highly regulated as to be equivalent from an investor’s perspective to a utility, then government would have far more control and insight into money flows, markets, consumers, taxable corporations, and private information in general.

This argument is not as far-fetched as it may seem. The United States Tax authorities have already used US banks to force banks in over one hundred countries to comply with the FATCA (Foreign Account Tax Compliance Act) legislation. This forces German banks, as an example, to withdraw 30 percent tax from US citizens accounts held with these foreign banks. And it forces these same German banks to expose private and confidential information to US banks, failure of which leads to cessation of trading with US banks.

Russian banks have been excluded from the global banking fraternity since the US led sanctions against Russia, following Putin’s invasion of the Crimea and Eastern Ukraine. These sanctions were enabled by using US banks and by ordering them to close all trading positions with Russian banks. By fining banks in the United States heavily – and by continuing to oppress the idea of private enterprise and capitalism itself in regulating and punishing banks – government will ultimately wrest control away from private enterprise, and banking will become an extension of the state.

In a world in which one agrees with US foreign policy and with its tax and estate duty laws, then all of this would seem somewhat innocent. The fear is that there may come a time when one does not necessarily agree with their outlook on the world, but by then it might be too late.