A new study from a University of Pennsylvania researcher says that the largest “too big to fail” banks would not be profitable if it weren’t government assistance.

Large banks

Large banks reap $102 billion benefit from US government

Based on previously reported estimates of the value in a government risk guarantee, the large banks receive “the combined financial advantages and subsidies for the six biggest U.S. banks since the start of 2009 was at least $102 billion.”

Report author Nizan Geslevich Packin from the Penn’s Institute for Law and Economics connects the dots, pointing out that follow up studies estimate that “the profits of two of America’s large banks would have been negative if not for implicit and explicit government subsidies.”

Why does the government’s free insurance policy help the large banks so much?  “The most significant implicit subsidy stems from market perception that the government will not allow the biggest banks to fail — i.e., that they are “too-big-to-fail” (TBTF) — enabling them to borrow at lower interest rates,” the report says. “While the Dodd-Frank Act attempts to solve the TBTF problem, it does not prohibit the government from giving financial support framed in a general fashion.”

Difficulty estimating

The report notes the difficulty quantifying the exact benefit from government’s oblique subsidies handed to the large banks due to “the lack of any formal or transparent data, and discusses the perverse effects and incentives that result from the subsidies, such as pushing the banks to borrow more, take excessive risks, and act unethically.”

It is here Packin walks into a fascinating minefield when he discusses unethical behavior.  What is the value of influence over the judicial process to the large banks that enables them to “act unethically?” This is particularly difficult to estimate, the report determines.

“A large number of the non-cash political interventions are difficult to quantify because the data necessary to do so is deficient particularly because many government programs are involved, across different agencies, in the financial sector. Fourth, a semi-immunity policy, which has been nicknamed “too-big-to-jail,” de facto exempts the biggest banks from criminal statutes and increases the absolute value of the TBTF subsidies as it translates into an additional economic advantage.”

In other words, crime pays for the large banks.  The fact is they have engineered a system where criminal actions are seldom investigated — and this is hard to value.  Perhaps it is hard to value because the US justice system has never volunteered control to Wall Street to such depths.

When considering the issue of when the decline in the Justice system towards Wall Street started, Packin’s start point for the acceptance of Wall Street criminality has a debatable start point.

“Following the financial crisis, it has become known that one of the perverse effects of the TBTF problem is the government’s “deferred prosecution” policy for large banks that violate criminal. This policy, which is legal,was nicknamed too-big-to-jail, and causes more and more anger,as reports about the biggest banks’ wrongdoings keep getting released. Trying to justify this policy, Attorney General Holder explained that the DOJ could not indict large banks because that might harm the economy.Further demonstrating this policy, in 2013 JPMorgan reached a $13-billion settlement with the government for the bank’s role in creating the 2008.  And even though the government declared that this does not release JPMorgan from potential prosecution, megabanks typically receive deferred or non-prosecution agreements, and based on such settlements avoid indictment or convictions.”

When did large bank control of US justice system start?

Some might argue the point to nail the historic start of the US justice system being handed to the large banks occurred when, just after the turn of the century, a then young and ambitious US Justice Department attorney named Eric Holder wrote a letter  that provided DoJ the latitude to ignore criminal behavior if it might damage the economy. This was a heady time for the large banks financial lobby, as their recognized henchmen, Larry Summers and Robert Rubin, had just made an intimidating statement by manipulating the ouster of CFTC Chairwoman Brooksley Born.

But putting aside the actual date as to when the large banks influence over the justice system began, what can be documented is after that point a surge in criminal behavior occurred. Large banks were documented to launder money for drug cartels and terrorist states such as Iran with criminal immunity.  A select group of powerful Wall Street elites almost bragged about their impunity through their actions.  Consider the Wall Street power players at MF Global, who were documented to have been given numerous warnings, including from a regulator, not to transfer customer cash.  As if it was known an investigation wouldn’t take place, the warnings were ignored and an illegal transfer of MF Global customer assets occurred.  The US Justice Department can be independently documented to have blocked the investigation into MF Global and its once elite CEO Jon Corzine.  Why did they block this investigation?  If MF Global Holdings Ltd (OTCMKTS:MFGLQ) failed would it be a threat to the economy?

Packin doesn’t dive this deep, but he does ask the right questions, particularly regarding why individuals who are involved in large bank crime fail to face justice?

Providing large banks criminal cover discriminates against small banks

Discussing the unpunished fraudulent financial products that were at the heart of the 2008 financial crisis, Packin talks about how the “Holder Letter” and the general policy not to go after large banks criminality has unintended consequences.

“Letting JPMorgan Chase & Co. (NYSE:JPM) and other banks escape criminal liability, much like not prosecuting the individuals who managed those banks, is a discrimination of smaller banks and disregards principles of equality under the law.Many commentators argue that the biggest banks’ executives and managers behaved unethically and helped fuel the financial crisis, yet such individuals typically do not get prosecuted.Accordingly, it is fair to argue that the too-big-to jail policy encourages criminal behavior as it incentivizes banks to continue behaving unethically. Certainly, a simple cost-benefit analysis shows that even if a fine is greater than a criminally obtained profit, which is usually not the case, such a fine can be paid by committing more crimes in the future,for which the banks and their executives will probably not face criminal liability.”

In the context of the banking sector, it appears that the government subsidies reinforced undesired incentives amongst banks’ executives that resulted in unwanted consequences. Specifically, TBTF subsidies distort economic incentives and encourage banks to (i) excessively borrow, (ii) take excessive risks,and (iii) expand into various unrelated industries.”

Has the US justice system been sold on the cheap?

These are all hot topics, yet perhaps most interesting is consideration to the unintended consequences that Packin mentions.  What have been the unintended consequences of the US Department of Justice blocking investigations into criminal behavior?  Judging by MF Global Holdings Ltd (OTCMKTS:MFGLQ), it has only encouraged a flagrant disregard for the law that leads to credible hedge fund managers on Wall Street saying it is now an area filled by “lawlessness.”  To be sure most of Wall Street is not involved in criminal behavior. Why the DoJ doesn’t aggressively target the brazen defiance of law remains unclear, until we consider incentives.

Lanny Breuer moved from a good living as a lawyer to a $4 million per year salary after his documented time spent blocking investigations and

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