Bailouts and Bad Actors

The $500 billion business rescue provision of the coronavirus relief bill will be less of a slush fund than originally envisioned, thanks to the addition of some significant safeguards such as the creation of a special inspector general and a Congressional oversight commission.

There has also been a welcome move toward transparency through a requirement that the Treasury Secretary post details on each loan, loan guarantee or other form of assistance soon after the award is made.

Yet there is one risk the bill does not address: the possibility that among the companies sharing in the federal government’s largesse will be regulatory scofflaws and other corporate bad actors.

There are some notable precedents for such an outcome. The Troubled Asset Relief Program, in fact, was largely an effort to bail out the financial institutions whose misconduct to a great extent caused the meltdown of 2008. The biggest TARP recipient, with $67 billion in support from the Treasury Department, was American International Group, which had sold large quantities of risky credit default swaps. Other giant banks that helped generate toxic securities were also high on the TARP loan list, including Bank of America and Citigroup ($45 billion each) as well as JPMorgan Chase and Wells Fargo ($25 billion each).

Along with the TARP loans, these banks also benefitted from massive liquidity programs implemented by the Federal Reserve and the Federal Deposit Insurance Corporation. The data available on these programs, which include lots of short-term loans that were frequently rolled over, add up to more than $3 trillion for Bank of America and $2 billion each for Citigroup and Morgan Stanley.

On top of all this, banks received what amounted to subsidies — $435 million in the case of JPMorgan Chase – through incentives provided to mortgage servicers under the Home Affordable Modification Program.

It was unavoidable that the TARP program, designed to rescue the whole financial system, would end up assisting bad actors. The problem is that those corporations continued to exhibit anti-social behavior after being bailed out.

Consulting the data in Violation Tracker, we see that since 2010, Bank of America has paid more than $63 billion in penalties. Much of this stems from lawsuits linked to the period leading up to the financial crisis, including those brought against companies purchased by BofA, especially Merrill Lynch and the predatory home lender Countrywide Financial.

Yet BofA also got in new trouble of its own. For instance, in 2014 it was ordered by the Consumer Financial Protection Bureau to provide $727 million in relief to credit card customers who had been charged for services they were not receiving.

Since 2010 Citigroup has paid more than $16 billion in penalties. Here, too, much of that total relates to cases stemming from the crisis – but not all. In 2015 it, along with other major U.S. and European banks, pled guilty to conspiring to manipulate the foreign exchange market. Citi’s penalty was $925 million.

And then there’s the case of Wells Fargo, which in the years after getting bailed out, has become a poster child for corporate irresponsibility as a result of its brazen sham-account scandal and other controversies.

Some of the bank misconduct of recent years could have been prevented if the federal government retained the equity stakes it took in TARP recipients while the loans were in effect. In the case of AIG the government had taken control of about 80 percent of the company. Smaller stakes were taken in other recipients.

The government used those stakes mainly to make sure that the loans were repaid, and in the end the feds made a profit on TARP. Yet those ownership interests could also have been used to retain a measure of influence over corporate governance and decision-making on issues relating to regulatory compliance and overall good behavior.

This approach could also apply to the coronavirus relief package, which seems to allow for the possibility that the federal government will take equity stakes in corporations that receive large amounts of financial assistance.

Now as in 2008, Congress cannot avoid providing assistance to bad actors, since doing so would harm employees at those firms. Yet it could use equity holdings to discourage corporations from resuming their bad behavior after we get through the pandemic.

Note: Data on the companies that received TARP bailout loans and liquidity assistance from the Fed and the FDIC can be found on this new Subsidy Tracker page, which also contains a list of corporate recipients of Recovery Act grants, loans and tax credits. Data on the misconduct of these and other companies can be found in Violation Tracker.  

A Pandemic Is No Time to Dismantle Regulatory Safeguards

As much of the economy melts down amid the coronavirus pandemic, many large corporations are lining up for financial bailouts from the federal government. Assuming the right safeguards are put in place, these payments may be justified. Yet there is a risk that big business may also seek another kind of assistance whose benefit is more dubious: relief from regulations.

Some loosening of restrictions make sense in a crisis, and federal regulators are already taking steps to address immediate needs. The FDA is changing rules so that private labs and state health departments can more readily use covid-19 tests developed outside of the agency. HHS is allowing healthcare providers to bill Medicare for telemedicine sessions.

Those are the no-brainers. But what about the decision by the Federal Motor Carrier Safety Administration to relax restrictions on truck driver hours for those making emergency deliveries? Do we want sleepy drivers on the road, even if they are doing essential work?

And then there are the calls from big banks for lower capital requirements and the easing of periodic stress tests. The point of those requirements is to make sure banks are in a position to weather a downturn. Relaxing the rules is something the big banks were urging well before the pandemic, and their push now may be little more than an effort to exploit the crisis.

We are likely to see more calls for regulatory easing both from corporations and from Trump Administration agencies such as the EPA that have already been trying to undermine existing safeguards.

There is also a debate on whether regulatory rulemaking should continue at a time when many regulators are working from home and many advocates may have a harder time monitoring current proceedings.

Since many of those proceedings involve efforts by industry and the Trump Administration to roll back or eliminate current rules, delays would provide a welcome obstacle to the deregulatory juggernaut. On the other hand, agencies may use the pandemic as an excuse to reduce the opportunities for public interest groups to intervene in the process.

Another gnarly question is how to handle bailouts for corporations that have less than stellar records when it comes to regulatory compliance. We don’t want to ignore the needs of employees of those companies who might otherwise lose their jobs, but it also doesn’t feel right to be handing over large sums to firms that have flouted the law.

If those payments are going to happen, among the strings that need to be attached could be provisions requiring companies to strictly adhere to all applicable laws and regulations. Scofflaws would be compelled to repay the money and face other serious consequences.

Big business should not be allowed to use the covid-19 pandemic as cover for undermining safeguards that protect us from the many other dangers in the world.

Note: Violation Tracker has just been updated. It now contains more than 412,000 entries representing more than $616 billion in penalties. The corporation with the biggest jump in its penalty total is Wells Fargo, due to its recent $3 billion sham-account settlement with the federal government.

Another Crooked Bank?

For the past three years, Wells Fargo has been pilloried for having created millions of bogus accounts to extract unauthorized fees from its customers. Now it seems Wells may not have been the only financial institution to engage in this type of fraud.

The Consumer Financial Protection Bureau, despite having been somewhat defanged by the Trump Administration, has just filed suit against Fifth Third Bank for similar behavior. Based in Cincinnati, Fifth Third is a large regional bank with branches in ten states and total assets of about $170 billion.

According to the CFPB’s complaint, the problem at Fifth Third arose when it, like Well Fargo, imposed overly aggressive cross-selling targets on its employees, causing them to create bogus accounts to meet those goals. These actions not only generated illicit fees, the complaint states, but also exposed customers to a higher risk of identity theft when, for example, online banking accounts were created without their knowledge. The issuance of unauthorized credit cards may have harmed customers’ credit scores.

The agency is asking a federal court to order Fifth Third to stop these practices and pay damages and penalties for its actions. The bank issued a press release denying the allegations and vowing to fight the lawsuit vigorously.

Although its “rap sheet” is a lot shorter than those of Wells Fargo and the other megabanks, Fifth Third has not been free from controversy. Violation Tracker’s tally on the company runs to more than $132 million in penalties.

One of the cases on the list was brought by the CFPB. In 2015 the agency announced that Fifth Third would pay $21.5 million to resolve two actions—one involving allegations of using racially discriminatory loan pricing and another involving deceptive marketing of credit card add-on products. The second case included allegations similar to those in the new case: telemarketers for the bank were alleged to have failed to tell cardholders that by agreeing to receive information about a product they would be enrolled and charged a fee.

Fifth Third’s largest past penalty was the $85 million it agreed to pay in 2015 to settle a case brought by the Justice Department and the Department of Housing and Urban Development concerning the bank’s improper origination of federally insured residential mortgage loans during the housing bubble.

In 2013 Fifth Third paid $6.5 million to settle an SEC case concerning the improper accounting of commercial real estate loans in the midst of the financial crisis. It has also paid out more than $8 million in wage theft lawsuits.

If the allegations against Fifth Third hold up, bank regulators and federal prosecutors will also have to determine whether the scheme occurred at other financial institutions. Megabanks such as JPMorgan Chase and Bank of America have run up billions of dollars in fines and settlements for many different kinds of misconduct. We need to know whether the creation of sham accounts should be added to the list.

Cracking Down on Modern-Day Child Labor Abuses

When the Massachusetts Attorney General announced in January that Chipotle was being fined over $1 million for child labor violations, it was a jarring reminder that a practice usually associated with the sweatshops and coal mines of the early 20th century is still with us.

The Fair Labor Standards Act of 1938 put restrictions on the employment of minors but did not abolish it entirely. Instead, it established minimum ages for various kinds of work and set restrictions on working hours.  States have child labor laws of their own.

Compliance with these rules was far from universal, but it appeared that the violators were mainly small businesses. The U.S. Labor Department’s Wage and Hour Division did its best to investigate these abuses and imposed penalties that typically amounted to around $10,000 and involved a single location, even when it was an outlet or franchise of a much larger corporation.

Massachusetts AG Maura Healey is abandoning that approach and bringing broader actions that highlight the magnitude of the problem. The Chipotle case included $1.37 million in restitution and penalties for an estimated 13,253 child labor violations and other state wage-and-hour infractions at the company’s 50 corporate-owned locations in the state. As part of the settlement, Chipotle also agreed to pay $500,000 to help create a fund to be administered by the AG’s office to educate the public about child labor and to provide training opportunities for young people.

Healey’s investigators had found that Chipotle regularly employed minors without work permits, required 16- and 17-year-old employees to work later than the law allows, and in some instances had minors working beyond the nine-hour daily limit and the 48-hour weekly maximum.

Chipotle is not the only large company targeted by Healey. In February her office announced a $400,000 settlement with Wendy’s International covering an estimated 2,100 violations at its 46 corporate-owned restaurants in the state. The infractions were similar, such as having 16- and 17-year-olds working later than allowed and beyond the nine-hour daily limit.

Last year, the Massachusetts AG reached a $409,000 settlement with Qdoba Restaurant Corporation for the same kind of violations at its 22 corporate-owned locations.

The consequences of overworking minors are the same as they were was a century ago. Long hours on the job interfere with school work and can negatively impact the health of young people. Fast food outlets may not pose quite the same physical hazards as the factories and mines where children were once employed, but they are far from risk-free.

For instance, there have been many reports of sexual harassment of young workers at restaurant chains such as McDonald’s, sometimes on the part of managers. Such harassment is a problem for workers of all ages but is particularly serious when the victims are minors.

Low unemployment rates and labor shortages are making it more common for employers to turn to young workers to fill in the gaps. Yet we should make sure that these businesses do not break the rules when they do so. Other regulators should follow the lead of Massachusetts in getting tough with employers who exploit the most vulnerable workers.