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Bank of America's $17 billion penalty is arguably too little, definitely too late

$17 billion is a big chunk of money, but what message does that penalty send?
$17 billion is a big chunk of money, but what message does that penalty send?
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Bank of America has reached a $17 billion settlement with the Justice Department as a settlement in an investigation into the sale of toxic financial products in the run-up to the financial crisis, the Associated Press reports. The agreement could happen as soon as Thursday.

That $17 billion will be the biggest penalty paid by a single financial institution as a result of misdeeds that led to the crisis. It comes after a couple of years marked by a large crisis-related settlements. In July, Citi agreed to pay $7 billion for sales of mortgage-backed securities, and last November, JPMorgan also agreed to pay $13 billion to settle charges related to mortgage backed securities.

Whether such settlements are big enough is debatable. $17 billion is a big settlement, even for a huge bank like Bank of America — its revenues last year were nearly $90 billion, according to Bloomberg, making this settlement just under 20 percent of its annual revenues. Then again, how do you put a price on the activities that helped lead to the crisis?

Either way, one thing is certain: many of the settlements imposed since the crisis have punished without deterring, as one expert explains.

"Think of the message it sends," says James Angel, professor of finance at Georgetown University's McDonough School of Business. "Let's say you're a sleazy bond trader and you can't think beyond this year's bonus, and you kind of look the other way at some of the dodgy stuff your department might be selling, and six years from now your employer pays the penalty. Is that going to deter you from doing anything bad?"

In other words, if you're a 2005 Countrywide Financial or Merrill Lynch worker issuing bad mortgage-backed securities, there's no immediate threat to you if the government is only going to punish your company in nine years. And even then, it will only punish your company after it's been bought and subsumed into Bank of America.

"That's the problem with [the settlements]," says Anat Admati, professor of finance and economics at Stanford University. "It's the people who did them, the structure that allowed it in these corporations, that made possible, and the question is what to do to make it not happen again."

It's not just about holding people personally responsible and making justice swifter, however. While punishment today would ideally deter future wrongdoing, ideally an effective regulatory system would have prevented institutions from threatening the national and global economies. Putting that in place would mitigate the need for so many settlements in the future.

What that would look like has been heavily debated, of course, but one proposal is simply making sure banks have bigger capital cushions. In their 2013 book The Banker's New Clothes, Admati and co-author Martin Hellwig propose less debt and more capital at banks, with leverage ratios in the 20 to 30 percent range, as Vox's Matt Yglesias reported. That's well above the Fed's 5 percent threshold for the biggest banks — itself an increase over the 3 percent imposed by the international Basel III agreement on banking regulation. The idea is to make sure banks' debts never exceed their assets.

As it stands right now, the current regulatory system may well be insufficient to prevent another crisis. And the most recent DOJ actions, while they impose some pain on the banks now, may likewise do very little to keep banks from inflicting pain on the economy in the future.

"Are we happy that this is the system? We keep having wrongdoings, we keep pursuing them," says Admati. "Obviously you want to punish, but you want to punish in a way that prevents. If somebody's speeding, you prefer that they don't speed."