Depending on which agency does the talking, banks are either in great shape or quite vulnerable. The financial services industry likes to parade the results of the Federal Reserve’s on-going stress tests. By that measure, America’s eight largest banks are truly “too big to fail.” Citigroup, for example, clocked in with an impressive 8.2% ratio.
The Fed’s stress test measures how many losses a bank can withstand before requiring a bailout. Right now, some in the government claim the banks are in great shape.
The Federal Reserve issued a statement last month saying,
“Higher capital levels at large banks increase the resiliency of our financial system. Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn.”
The most recent stress tests suggest that all of our major banks could survive another 2008 style financial crisis without having to ask Congress and the American taxpayers for more money.
Lest you think all the news is rosy, however, this month the Vice Chairman of the Federal Deposit Insurance Corporation told a much different story. FDIC’s Thomas Hoenig says that the big banks only have a leverage ratio of 4.97%. That means that each dollar of assets is funded with 95 cents of borrowed money.
Not one to mince words, Hoenig says,
“The Global Capital Index illustrates how financial resiliency is still sorely lacking. The sector of the financial industry with the greatest concentration of assets is the least well capitalized. Plainly put, it operates with the largest amount of borrowed, or as we say, leveraged funding, and thus it is the least well prepared to absorb loss.”
As a society, we tend to focus on the good news and ignore the bad news. Just 7 years ago, Bill Bernanke and Fed Chairman Alan Greenspan were claiming all was well in the banking world. But at least one Fed governor, Edward Gramlich, was raising caution flags. He was ignored.
Another financial sector meltdown will occur, although no one can predict when. Unfortunately, we believe the big banks such as Bank of America, Citi, Wells Fargo and Chase will once again be looking for a handout.
Part of the problem is the corporate culture that fosters cutting corners and committing fraud. After a few years of true progress, banking fraud has returned and now operates at the same pace it did in 2007. Only the tactics and the faces have changed.
Why do we write these posts? Over the years we have represented many wonderful men and women who worked in the banking industry. These are the people who silently watched as a few greedy senior managers within the bank bent the rules and hid their crimes.
An 1863 law called the federal False Claims Act allows whistleblowers with inside information about banking fraud to come forward and obtain a reward. It is one of the most powerful tools in the fight against bank fraud.
To qualify for an award, whistleblowers must have original source (inside) information and the fraud must impact a federally funded program such as TARP or residential mortgages.
Crimes and behavior that only hurts the bank can also lead to awards, although under a different statute, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA).
Both laws pay generate awards to whistleblowers. If enough people come forward and report these terrible behaviors, we will never have to determine whether the FDIC or Federal Reserve’s predictions are correct. Unfortunately, there are so many derivatives and borrowed money propping up bank balance sheets these days that we worry any serious ripple in the economy could send banks into a death spiral.
Think you have information that qualifies you for a whistleblower award? Give us a call. Our clients have received over $100,000,000.00 in award monies. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731. All inquiries protected by the attorney – client privilege.
Anyone can make a difference. Few people step up to the challenge, however.
MahanyLaw – America’s Fraud Lawyers