STOCK MARKET WATCH, Wednesday, December 21, 2011.

[xchrom]

65. Banking: the gift that keeps on giving – just not to you

http://www.guardian.co.uk/business/economics-blog/2011/dec/20/banking-gift-keeps-giving

Christmas came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in the autumn of 2008. The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four for actions that included taking huge financial risks while "knowing that the real estate market was in a 'bubble'". The FDIC sought to recover $900m (£575m), but the executives have just settled for $64m, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.

To be sure, the executives lost their jobs and now must drop claims for additional compensation. But, according to the FDIC, the four still earned more than $95m from January 2005 through September 2008. So they are walking away with a great deal of cash. This is what happens when financial executives are compensated for "return on equity" unadjusted for risk. The executives get the upside when things go well; when the downside risks materialise, they lose nothing (or close to it).

At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed. That collapse has impacted non-bankers in many negative ways, including through the loss of more than 8 million jobs.

It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country. A difficult fiscal conversation still lies ahead at the federal level, but cuts and contractions of various types seem likely.