Why did the big banks get bailed out?
The Wall Street Journal reported Wednesday that the federal government bailed out the big three banks, JPMorgan Chase, Bank of America and Citigroup, but only on the condition that the firms pay a huge $3.8 trillion in fines and compensation.
The Journal cited a draft of the agreement, which was expected to be completed this week, which states that the banks must pay $2.4 trillion in punitive damages and $3 trillion in disgorgement over the bailout.
The companies had promised to pay about $2 billion in fines.
A spokesman for Treasury Secretary Jack Lew told Reuters on Wednesday that “we did not find any evidence that the fines and disgorgements were excessive, and that they were appropriate in light of the seriousness of the misconduct.”
A number of the banks have pleaded guilty in the wake of the bailout and have paid $1.6 trillion in compensation, though it remains unclear how much they will ultimately be paid.
The U.S. government, however, could also choose to award them a bigger fine and disgorgements, which could add up to $1 trillion.
Banks have already begun paying $400 billion in compensation to the U.K. and Germany over their financial problems, but the amount of money they have to pay will likely increase significantly.
“If the banks get more than that, then that is going to be a very tough time for them and their shareholders,” said Richard Hirschfeld, a financial analyst with the law firm BDO, in a Bloomberg Businessweek interview last week.
Some investors have speculated that the government’s decision to put the banks into Chapter 11 protection would be a blow to the bank industry.
“The banks, which have always had an interest in keeping costs down, are not going to get a whole lot of help from the government,” said Steve Benen, a senior partner at investment firm Covington & Hayes.
On Tuesday, the White House warned that the $2 trillion in government penalties and disgorptions could lead to more banks “collateralizing” on their own bad loans.