Too big to punish

Sticking it to Uncle Sam should attract harsh punishment. But, the fines Citigroup and Bank of America (BofA) will pay — $158 million and $1 billion, respectively — to settle claims they defrauded the US government look easily handled. Citi has even admitted fraud in its dealings over home loan insurance. A ban from participating in the government’s mortgage insurance programs would be a better deterrent. But, unfortunately, Washington needs big banks too much.

BofA’s alleged misdeeds are still murky since its settlement was conveniently wrapped up in the broader $25-billion deal between federal and state enforcers and big mortgage servicing banks over the so-called robo-signing transgressions. But, the complaint against Citi offers a brutal account of the drive for profit squashing quality control. The Federal Housing Administration (FHA) ended up insuring shoddy Citi mortgages that, in some cases, were in default within six months.

Federal insurance programs rely to a large extent on banks’ good faith in delivering mortgages that genuinely meet the required standards. Citi’s admission that it failed to do this came only after someone blew the whistle last year. It was a breach of the government’s trust and it has cost taxpayers money.

The penalties for ripping off the government usually go beyond dollars and cents. Yet Citi’s fine, in particular, is hardly crippling. And, BofA has already set aside enough money to cover a good chunk of its settlement. A temporary ban on doing business with the FHA, on the other hand, would deliver more punch and show others in the industry that Washington won’t tolerate abuses of its largess.

Yet that’s unlikely to happen. FHA, once a niche player focused on low-income housing, now backs about a third of new mortgages, including super-sized ones for wealthy home buyers. The market for FHA-qualified mortgages runs $25 billion a month. While Citi has only a two per cent share, BofA is the largest player with more than 26 per cent, according to FTN Financial, using mortgage servicing as a proxy for origination activity. Booting offending banks out of the government’s program could make mortgages even harder to come by.

At least that’s what the banks and other interested groups will have told their government masters, who are worried about the still weak housing market in an election year. So, Citi and BofA will pay their fines and promise to clean up their acts — while taxpayers can only hope the government will hold them to it.