Justice for Profit

The automobile industry has a disreputable track record of rolling out flawed vehicles that threaten consumer safety.  The inevitable recalls burden consumers with worry and wasted time.  No manufacturer has a monopoly on faulty cars.

Over the past several years, GM recalled 1.4 million cars due to a faulty ignition switch involving 13 deaths.  Ford recalled 465,000 due to a fuel leak and Chrysler recalled 49,400 due to a headlight problem.  Honda has recalled 250,000 cars due to brake defects and Nissan is recalling 1 million cars due to a passenger airbag defect.  Drivers have come to expect bad news and a scheduled wait at the dealer’s service bays.  

Fines in the automotive industry tend to be small potatoes where $17 million is considered over the top.  But in 2014, the Department of Justice (DoJ) fined Toyota $1.2 billion for its handling of the unintended acceleration problems in prior years.

Over in the banking industry, before the latest recession, some mortgage issuers gave mortgages to underqualified borrowers.  In the stress of the recession, those borrowers often defaulted.  Since then major banks have been untangling ownership of these subpar mortgages and verifying which mortgages are current or in default.   The mortgage debacle evoked some Congressional scapegoating of the bankers, partly because some Representatives pushed for banks to loan to low-income borrowers.  Some of that animus was distilled into the 2010 Dodd-Frank Act

Dodd-Frank launched a thicket of regulatory expectations for banks, brokers, mortgage lenders, and insurance companies.  Since then, regulators have been stacking up inquiries and accusations against the bankers.  The Consumer Financial Protection Bureau is focused on mortgage servicing failures, such as “robo-signing.”  In parallel, the Securities and Exchange Commission and the Department of Justice (DoJ) pursue the sales of the subpar mortgages, and in 2014 they fined JP Morgan-Citibank a surprising $13 billion, mostly for defective mortgages.

Other banks were fined for mortgage related issues.  The Bank of America has suffered a $60 billion legal tab related to buying Countrywide Mortgage and Merrill Lynch.  Of that, the Bank of America was fined $864 Million, as reimbursement for the shortfall in value from mortgages that Fannie Mae and Freddie Mac bought from Countrywide Mortgage. Likewise Deutsche Bank was fined $1.9 Billion by the Federal Housing Finance Agency for defective mortgage backed securities it sold to the US government.  During 2012, a total of $10.2 billion in fines was levied on banks.  

Most of the bank fines were a straightforward remedy for selling defective products.  HSBC’s fine was not.  HSBC was fined $1.9 Billion, not for blatant criminal behavior or a faulty product, but for “not following the regulations about how to monitor and or prevent money laundering.”   This accusation of administrative failure sounds a lot like the basis for Toyota’s colossal fine of $1.2 billion.  

DoJ says it fined Toyota not for making defective cars or for endangering consumers, but because it misled consumers, behavior that DoJ says is wire fraud.  By choosing to charge Toyota with wire fraud, DoJ avoided the limits on fines typical for recalls in the automotive industry.  That will empower DoJ to harvest large pools of unbudgeted cash as it moves this theory of crime from industry to industry.  

Since administrative lapses are common by all institutions we might soon rebrand DoJ as “Justice for Profit.” 

Alan Daley writes for the American Consumer Institute Center for Citizen Research

 

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