ANOTHER INSULT: WALL STREET FINES ARE TAX DEDUCTIBLE

 

By Ronald Fox

 

 

It a number of previous posts I bemoaned the failure of Federal prosecutors to subject big Wall Street banks to criminal prosecution for their assortment of misdeeds. (One notable exception was the criminal prosecution of Credit Suisse. See Credit Suisse Pleads Guilty To A Felony, But Gets Off Easy). Without criminal prosecution, I concluded that the heavy fines imposed on JPMorgan Chase and other Wall Street behemoths would not deter the various criminal wrongdoings that got them in legal hot water.  At the same time, I welcomed the seemingly huge fines, which federal prosecutors assured us were extremely stiff, the highest ever paid by banks.  They did seem impressive.  I said "seem," because now we know the big banks will pay nowhere near the full cost of the settlements.  A big chunk of the billions of dollars in fines they have to pay to various federal agencies and regulators is tax deductible.  

 

According to a Newsweek estimate, big banks such as JPMorgan Chase and Bank of America will receive deductions against the corporate tax that will amount to between half and nearly three-quarters of their multibillion settlements. (Smaller banks and nonbank lenders will be able to deduct even a greater amount.) Tracking the settlements and the deductions against taxes via government websites is almost impossible. The Department of Justice and other agencies don’t even seem to know how much tax deductions the banks are getting through the settlement deals. It’s Washington’s dirty little secret.

 

Now the full picture of why Wall Street executives have been so determined to avoid criminal prosecution comes into clearer focus. Oh sure, no one wants to go to jail, but because federal tax rules allow companies to deduct as an ordinary cost of doing business any restitution or compensation resulting from a settlement penalty or fine, there is an added incentive to cut a non-criminal deal. Penalties and fines in criminal cases are generally not deductible, as opposed to civil settlements. So it isn’t just fear of landing behind bars, but also concern for the bottom line, a concern the DOJ appears all too willing to accommodate. 

 

 

Hence for all their nefarious misdeeds, which include such transgressions as mortgage, investor, credit card and consumer fraud, forgery, perjury, bribery, money laundering, and sanction violations, and the immeasurable harm they inflicted on the U.S. and global economy, Wall Street banks in the end will only be forced to modestly deplete their financial accounts. American tax payers will make up the difference. Welcome to the world of giant banks: too big to fail, to jail, to curtail, and now, to tax. 

 

One has to wonder why the DOJ has allowed tax-deductible settlements, especially when they so proudly announce blockbuster fines. Maybe that’s why: so it can announce record fines. Offering the carrot of deductibility, they can craft a larger settlement, giving the impression they are tough on fraud. By downplaying that fines are deductible they can placate an angry public while taking care of their corporate friends. Dennis Kelleher, the chief executive of Better Markets, a nonprofit Wall Street watchdog group, says: “It’s PR crap. These banks caused the biggest crash since 1929 and they get civil settlements with immunity and tax deductions, all behind closed doors? It’s outrageous.” 

 

All this is a big insult to anyone with a thirst for justice. It’s not that the DOJ is opposed in principle to forbidding tax deductibility. Note the hefty nondeductible fines slapped on Credit Suisse and UBS for their roles in selling offshore tax-evasion services to wealthy Americans. BP was also not permitted to deduct its fine for the Deepwater Horizon oil spill. I guess foreign corporations don’t carry the same political clout as American companies do in our political circles.  

 

This doesn’t bode well for the future. With the new Republican Congress poised to dismantle what’s left of Dodd-Frank bank regulations, it seems just a matter of time before the next big Wall Street bubble burst. You can take that to the bank.