Banks Pay Billions to Settle Complaints, Receive Billions in Tax Breaks

Published January 21, 2013

The billions of dollars a dozen financial institutions recently agreed to pay to settle government complaints over banking and mortgage lending practices come with a twist: The financial institutions likely will receive billions of dollars of tax deductions.

Sen. Sherrod Brown (D-OH) sent a letter to federal financial regulators and the U.S. Department of Justice on January 17 in which he wrote, “The acts of these institutions are doubly harmful to ordinary Americans. They suffer first as homeowners, consumers, and investors, but they suffer again as taxpayers because companies can deduct the cost of penalties from their federal tax bills. It is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing.”

He added, “For too long, too many have treated breaking the law as a cost of doing business. It is not. Breaking the law should not be a business expense.”

Sen. Charles Grassley (R-IA) also has declared his opposition to the banks being allowed to deduct the settlements from their taxes.

“The government is abetting the behavior by not preventing the deduction,” Grassley told Marcy Gordon of the Associated Press. “The taxpayers end up subsidizing the Wall Street banks after the headlines of a big-dollar settlement die down. That’s unfair to taxpayers.”

Involves Biggest Banks

The lenders in January agreed with government regulators to pay approximately $9 billion to up to four million people whose homes were put into foreclosure through “robo-signing” or other improper or illegal means. “Robo-signing” jumped into the lexicon shortly after the financial crisis hit, as lenders rushed to foreclose on homes by claiming employees had reviewed and signed mortgage documents and followed proper foreclosure procedures when in fact they had not.

The lenders include Goldman Sachs, Morgan Stanley, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank, and Aurora.

Bank of America also agreed to pay government mortgage company Fannie Mae approximately $11.6 billion to settle claims that it had improperly sold Fannie Mae bad loans. The settlement consists of a series of deals, including a direct payment of $3.6 billion to Fannie Mae and a buyback of $6.75 billion of bad loans.

Cost of Doing Business

“Taxpayers should not be subsidizing, or in any way paying for, these corporations’ wrongdoing. But that’s exactly what will happen unless the IRS or other federal agencies prevent it. Based on past experience, unless federal agencies expressly forbid it, these banks will write off the cost of these settlements as ordinary business payments and taxpayers will be forced to pick up a significant part of the tab,” said Phineas Baxandall, senior analyst for tax and budget policy at the consumer advocacy group U.S. PIRG, in a statement.

“That could be the equivalent of giving a $4.06 billion tax subsidy to Bank of America and a $2.975 billion subsidy to the other banks that includes BoA,” Baxandall said.

Avoiding Deduction Ban

Federal law does not allow penalties, fines, or settlements in lieu of penalties or fines to be deducted from taxes, but Baxandall said corporations typically deduct them anyway.

“In this case, the banks will likely also say that they can deduct the government-negotiated settlements because they are paid to private parties. Just because these banks treat law-breaking as an acceptable risk and a ‘normal’ part of doing business doesn’t make it right, and the public certainly shouldn’t have to pay for it,” Baxandall said.

Barred for BP, UBS

He noted the U.S. Justice Department and Securities and Exchange Commission have prevented this in recent settlements with the oil company BP and Swiss bank UBS. But he also noted neither agency is involved in these settlements, and there is no systematic disclosure of information about this issue to the public.

BP was hit with $1.3 billion in fines, payments of $2.4 billion to the National Fish and Wildlife Foundation, and $350 million to the National Academy of Sciences for the Gulf of Mexico oil spill in 2010. In December, UBS agreed to pay $1.5 billion for manipulating interest rates.