Cost of dodgy deals

While most of the countries in the developed world continue to pay the cost of dodgy mortgage deals in terms of immense losses to their economies, their financial systems have been made to suffer the consequences of their slyness and poor judgement. In yet another settlement, Bank of America (BofA) on 21st August, 2014 agreed to a record dollar 16.65 billion deal with US authorities to settle claims it sold risky mortgage securities as safe investments ahead of the 2008 financial crisis. Out of this amount, BofA would pay dollar 9.65 billion in cash and provide another dollar 7 billion as relief to consumers affected by losses tied to those securities. The beneficiaries of settlement also included a group of states which had claimed that the Bank's actions had caused huge losses to their economies and citizens who had lost their houses in part due to the cumulative effect of the crash of the residential mortgage-backed securities (RMBS). The settlement with the US Department of Justice, the Securities and Exchange Commission and other authorities including some individual states has resolved a number of civil investigation cases against the Bank but does not absolve the BofA from potential criminal cases, especially involving 'Countrywide'; once the country's largest home-loan issuer. Bank of America's Chief Executive, Brian Moynihan, said in a statement that "we believe this settlement, which resolves significant remaining mortgage-related exposures is in the best interest of our shareholders, and [will] allow us to focus on the future".
The settlement has a strange history. BofA had pooled hundreds of billions of dollars worth of low-quality home mortgages into securities that were issued and sold to investors by the Bank including Merril Lynch and Countrywide as high-quality investments. The RMBS, however, plummeted in value as the housing market bubble burst in 2006-07, and many of the mortgages in the bonds, often more than half, soured, causing investors huge losses. These losses mounted across major banking institutions and added heavily to the fall in home values across the country, snowballing ultimately into the financial crisis and the deepest recession since the 1930s.
It would be worthwhile to point out that this is not the first settlement since the 2008 crisis began. Ally Financial, Bank of America, Citigroup, J. P Morgan Chase and Wells Fargo had agreed to a joint settlement of dollar 25 billion in March, 2012, J. P Morgan Chase had agreed to pay a penalty of dollar 13 billion in November, 2013, 13 mortgage servicing companies were fined dollar 9.3 billion in February, 2013, Bank of America had agreed to pay a separate settlement of dollar 9.3 billion to housing finance agencies Fannie Mae and Freddie Mac in March, 2014, BNP Paribus was fined dollar 8.9 billion for violating US sanctions and Citigroup had agreed to settle charges over selling risky mortgage securities to investors as high quality amounting to dollar 7 billion in July, 2014. Huge penalties to highly reputed and large-sized financial institutions for circumventing or violating the banking laws is an indication of the resolve of the relevant authorities of the US to spare no effort to cleanse the system and check the possibility of future deception or misconduct. Of course, the significance of the present settlement lies in the fact that the agreement amounts not only to rectifying the harm caused by the BofA but has ensured the accountability of the system for the American people whose tax money was spent to compensate for the misdeeds of the top bankers of the country. Ground rules for the future were also laid down when the US attorney for Western District of North Carolina insisted that "today's settlement attests to the fact that fraud pervaded every level of the RMBS industry. As we deal with the aftermath of the meltdown and rebuild our economy, we will hold accountable firms that contributed to the economic crisis."
The unfortunate episode carries lot of lessons for all the sectors and entities, particularly the banking industry. Bank of America, Citigroup, J. P Morgan Chase, Wells Fargo and BNP Paribus are some of the biggest financial institutions in the world, which were subjected to intensive investigation and punished for their deceit. This shows that the crime does not pay and the size of the institution does not matter if the government is really determined to probe suspicious activities and fraud to ensure highest standards of ethics and morality in various businesses. In a way, financial crisis of 2008 has also revealed the importance of financial system in the working of the various economies. Banks do not only play an extremely crucial role in the economy of a country but have to maintain highest standards of integrity, disclosure requirements, impeccable record and ensure transparency in their dealings. Promises once made must be kept in order to enhance reputation and fair play to remain in the banking business. Other countries also need to follow the example set by the US authorities so that the global banking system does not deviate from the traditions expected of it. Hopefully, commercial banks in Pakistan and the State Bank would be monitoring these developments and would be up to the task if such an untoward situation develops in the country.