Where does all that settlement money go?
In the Alternative Banking meeting yesterday we kicked things off with a great visit from Katya Cohen, author of a new book called The American Spellbound, where she describes the fictional account of a women working in a large bank and learning to fit in with the mindset of greed combined with a superhero complex. Good stuff, and it explains at least a little bit to me about what the heck was going on in the one outrageous Robin Hood Foundation awards night dinner I went to at Cipriani way back when.
After that we talked for a bit about the recent S&P settlement with the Justice Department, which was one of those nobody-goes-to-jail deals that cost $1.5 billion.
Now, that’s a lot of money to you and me, but it’s not that much to huge financial institutions; in the case of S&P it’s about two years of profit, depending of course on which two years you’re talking about:
That’s not what we focused on yesterday, though, because it’s really old news. All these massive settlements are relatively manageable for the financial companies that end up paying them. In fact that is implicitly part of the deal, and it’s part of why the system is so contemptible. In the end, the settlements don’t substantially threaten business as usual. Instead, as Gerald mentioned, you should take the word literally: the settlements do nothing but “settle” things back to the way they were.
That brings us to the question we focused on yesterday: where does all this money go? It’s big money after all, and if it goes into state coffers, to be used as Cuomo or whomever sees fit, then the concern is that, as corrupt as this system is, there will be powerful forces at work to keep it just like this. If a given state (New York State, I’m looking at you) gets addicted to this cash flow, there will be no reason to change tactics and, instead of massive fines, simply jail wrong doers and break up or dissolve corrupt institutions.
In fact, if you think about it, there will even be reasons for places like New York State to allow wrongdoing in order to cash in for the settlement a few years later. The more you think about it, the more this “big fines but no jail time” settlement practice we now have in place seems like a way to legalize and tax crime.
Anyhoo, we might be getting ahead of ourselves (although, equally, we might be late to this game) and so we’d like to follow the money. Where does the settlement money go? Do the funds earmarked for “victims” actually go to victims? Is this information available beyond vague statements like “S&P parent McGraw Hill Financial Inc, said it will pay $687.5 million to the U.S. Department of Justice, and $687.5 million to 19 states and the District of Columbia, which had filed similar lawsuits over the ratings“? Can we build an infographic to see who might be compromised in terms of demanding and enacting a more functional white-collar crime system?
mathbabe 
Cuomo seems to think it’s found money for him to allocate — “in a responsible way”, of course.
http://polhudson.lohudblogs.com/2014/11/14/cuomo-settlement-money-wont-go-to-operating-expenses-like-school-aid/
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Slightly off-topic, but just to clarify the numbers: approximately $245 million of the settlement will be coming from the taxpayers:
“The rating agency Standard & Poor’s, which was accused of helping to cause the financial crisis with its inflated assessments of mortgage investments, is eligible to deduct half of the $1.37 billion settlement with state and federal prosecutors it agreed to this week, according to the U.S. Public Interest Research Group, a consumer-oriented nonprofit. The result would be a roughly $245 million reduction in its tax bill, the research group calculated.”
http://www.nytimes.com/2015/02/04/business/when-a-company-is-fined-taxpayers-often-share-the-punishment.html
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One can debate this quite a bit, but the NYT seems to assume that deducting a settlement is the wrong answer, rather than the right answer. I’m not so sure…
If a company loses money because their factory caught on fire, we don’t usually say that part of their loss is “coming from the taxpayers”–we say they got a tax deduction because they lost money.
FoW
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Despite being a soak-the-rich! kinda guy, I’m with FoW here. The logic of deducting legal costs from taxable income seems reasonable. If you think the government should collect a net amount of X for the offense, then set the settlement at X / (1-t).
There are other areas where I’d say we should not make things deductible — e.g. neither interest nor dividends should be deductible, because they are both part of the cash flow left after expenses to pay capital providers. The current differential treatment incentivizes companies to take on excessive debt, which is risky for the economy as a whole. (Of course, even if you could round up a majority to vote for something like that, the details of the transition would be extremely difficult to set up, because making an immediate shift, without providing a long period over which to retire debt and raise new equity, would give a lot of companies serious liquidity problems, and massively roil the bond market.)
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