Squashed

On Bank Liability and Farting in Windstorms

Regarding my recent post on Goldman Sachs and Morgan Stanley’s $557 million foreclosure inquiry settlement, Massagebyted wrote:

Isn’t this the monetary equivalent of a fart in a windstorm?

The short answer is not really.

The longer answer is that while a single $557 million payment isn’t that large, it should be read in the context of the other, larger settlments, including:

• The $25 Billion Attorney General investigation settlement with the five largest servicers
• A $11.6 Billion bewtween Bank of America and the government servicing entities
• Another $8.5 Billion by Bank of America with other investors
• The $8.5 Billion settlment that replaced the Independent Foreclosure Review. That will probably grow to about $10 billion.
• A total of $2.68 Billion in settlements, including $550 Million from Goldman Sachs for misleading investors) settlments from SEC enforcement actions.
• Fair lending settlements of $175 million for Wells Fargo and $335 million for Bank of America. (All prior fair lending settlments totaled $30 million).
• All the other stuff that I forgot to put on the list or still hasn’t been resolved yet.

Conventional wisdom says that the large lenders simply settle enforcement actions to avoid the hassle of dealing with them. That may have been true in the past—but it’s really no longer the case. These are big numbers.

In terms of total assets, these institutions are Bank of America, JP MOrgan Chase, CitiGroup, Wells Fargo, and Goldman Sachs have roughly $9 trillion in total assets. (These are the five largest holding companies.) This is before any liabilities (like customer accounts) are deducted. It also includes the value of credit card companies they own. So when we’re looking at the “value” of the company, it’s probably better to go off the market capitalization. Right now you could buy all of those companies for $561.81 Billion.¹. (Or you could buy Apple—which would be way cooler.)

When we add all these settlements together—and take into account that they’re still coming—we’re looking at the financial industry paying something like 10% of its value just to settle legal liability. That’s not 10% of profit or 10% of the portions of the companies that caused the problems. That’s 10% of everything.

Let’s put this all into fart in a windstorm terms. If you figure a proper windstorm is, say, an 8 on the Beaufort scale. That would give us windspeeds of, say, 20 meters per second. I’ll leave it to somebody else to work out the average force, in Newtons generated by a typical wind storm. Presumably, it’s a lot. Which leaves three critical questions. First, could a person survive a fart that produced 1/10th the force of a windstorm? Second, would flatulence of that magnitude launch you into orbit?