The agreement by investment bank Citigroup to pay a $7 billion fine for its role in the subprime mortgage crisis has been touted by federal prosecutors as a victory in holding the company accountable for its actions. Financial analysts, meanwhile, say the company itself is better off now that the weight of its liability in the matter has been mostly assessed.
The unanswered question is to what extent the settlement will help the nation’s housing market as it struggles to fully recover, and whether it will give home buyers and mortgage lendersmore clarity and confidence going forward. But penalties such as these are far better for the economy than stifling new federal regulations.
Requiring the company to pay fines and restitution for its role in the subprime matter is appropriate, but in context, the government has essentially taken $7 billion from the same company to which it loaned $45 billion just six years ago when it teetered on the verge of collapse because of its participation in the same subprime markets.
The situation reflects the policy conundrum with institutions considered “too big to fail.” The health of the economy may be linked to the vitality of corporations such as Citigroup and Bank of America, but that shouldn’t give those companies carte blanche to engage in the kinds of behavior that led to the housing crisis and subsequent recession.
Fines and potential criminal prosecution — which hasn’t been ruled out in the Citigroup case — are appropriate after-the-fact methods for the government to ensure companies don’t run roughshod over customers and investors. And they are preferable to a preventive regulatory posture that may burden institutions with over-zealous rules.
For example, mortgage-lending restrictions contained in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, passed in the wake of the housing meltdown, are designed to stop companies from issuing bad mortgages but mayalso be stopping them from writing good mortgages. Institutions and independent analysts say the housing recovery has not been as robust as hoped in part because of a layer of new regulatory rules that have inhibited the flow of capital.
It is better to hold companies accountable by the proper application of civil and criminal penalties than to smother them with over-reaching regulations. The $7 billion Citigroup will pay is not an unsubstantial number. It amounts to more than half of what the company would expect in annual net earnings. Likewise, Bank of America has offered to pay $13 billion to settle similar claims.
We expect that penalties of that size, along with the potential for criminal prosecution, offer a more effective deterrent to predatory, unfair or fraudulent business practices than a layer of complicated and cumbersome regulatory rules.