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Windfall from bank settlements sparks bickering over spending
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US authorities’ US$8.9 billion settlement last month with French bank BNP Paribas for sanctions busting will pay for New York cops to get live computer feeds of street crime and for new carpets in the offices of prosecutors, among many other things.
In the past few months, American regulators and prosecutors have forced some of the world’s largest banks to pay massive fines for everything from breaching US sanctions to alleged mortgage abuse and illegal tax schemes.
Now the question is what the US is going to do with all the cash. In some places — particularly New York state — that is leading to ugly wrangling over how to spend it.
Some of the US$18.5 billion in penalties US authorities have levied on banks since May was already earmarked in settlement papers for specific purposes, such as principal forgiveness on struggling homeowners’ mortgages.
But a lot is not allocated for anything in particular, raising many questions. One is whether there should be clearer standards for how such money is used by a maze of state and federal authorities. Another is whether the money has distorted incentives for officials.
One former prosecutor, who did not want to be identified, said the ability to use the money for broad purposes could motivate officials to demand higher settlements.
The authorities dismiss that notion. “That’s nonsense,” said Matthew Anderson, a spokesman for New York banking regulator Benjamin Lawsky, whose office has been a major player in recent settlements. “If they don’t want to face penalties, they shouldn’t break the law by financially supporting regimes involved in terrorism and genocide.”
Maze of money
Since May, Credit Suisse has coughed up US$2.6 billion for helping Americans evade taxes, BNP agreed to pay US$8.9 billion for violating US sanctions laws, and Citigroup last week agreed to pay US$7 billion to resolve claims it misled investors about shoddy mortgage-backed securities.
The majority of the money will go straight to the Treasury Department’s general fund, where it will help the US pay its bills.
The specifics of that spending are virtually impossible to track.
But other federal authorities still have some of the cash to play with. For example, the Justice Department will get a 3 percent management fee — about US$6 million — from the Citigroup deal for collecting the settlement money on behalf of another agency, the Federal Deposit Insurance Corp. The department didn’t return a request for comment on how it would spend the money. It has used similar fees from a settlement with JPMorgan to pay for more lawyers to work on other mortgage securities cases.
Also, most of the federal portion of the BNP deal — about US$3.8 billion — will be swept into the Treasury and Justice Departments’ asset forfeiture funds, where the cash will join seized proceeds from other criminal ventures.
By statute, such money is used to support asset forfeiture operations around the country, and state and local law enforcement bodies can apply for funds. The requests can include everything from money for expert witness fees to the costs of drug evidence storage.
New York authorities are getting some US$5 billion from the settlements, far more money than other states, thanks to the roles its officials have played in the investigations and negotiations. New York prosecutors started the investigation that led to BNP and other foreign banks, and the state banking regulator has leverage from its authority to revoke the banks’ licenses to operate in the state.
The office of Manhattan District Attorney Cyrus Vance plans to use part of the US$448 million it will keep from the BNP settlement on technology investments for the city’s police, including feeds from camera networks around the city. Once the fiber is laid, police will have the potential to retrieve video of, say, a suspect after an emergency call comes in.
Vance is also considering using the money for an illegal-gun market study, to improve safety in public housing in the city, and for upgrades to the law enforcement agency’s decrepit office space, where carpeting in some areas dates to the 1980s.
Chief Assistant District Attorney Karen Friedman Agnifilo said some of the projects have the ability to “transform” the criminal justice system.
‘Extremely confusing’
About US$4 billion from the recent settlements is destined for the New York state general fund and has already set off politicians, community activists and government officials who have all been lining up competing proposals for next year’s budget negotiations.
“There are huge question marks here and no transparency,” said Bennett Gershman, an expert on prosecutorial ethics who is a professor at New York’s Pace Law School. He said the discretion given to authorities on how to use the cash creates opportunities for abuse.
There have already been some unseemly struggles in New York in recent years. In 2009, then New York City Mayor Michael Bloomberg accused then Manhattan District Attorney Robert Morgenthau of maintaining secret bank accounts amid a fight over whether the city was getting its fair share of big settlements.
A similar feud developed between New York Attorney General Eric Schneiderman and the state’s Governor Andrew Cuomo over last year’s US$13 billion mortgage-related settlement against JPMorgan.
Cuomo accused Schneiderman of having too much power over how to spend the US$613 million obtained by the attorney general. Cuomo himself previously had used such power over settlement monies when he held the attorney general’s job from 2007-2010.
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