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Clinton's Wild Idea for Bank Fines Makes Perfect Sense

This is the third in a series examining some $65 billion of penalties paid by banks to U.S. regulators over mortgage-related abuses.

NEW YORK ( TheStreet) -- Few people appear to have noticed in November when former U.S. President Bill Clinton proposed using government proceeds from bank fines to build a national infrastructure bank.

"Where's that fine money going?" Clinton said on Nov. 11, when he was a guest speaker at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), the main trade group for Wall Street giants like JPMorgan Chase (JPM - Get Report)  , Bank of America (BAC - Get Report) and Goldman Sachs (GS) . "It should be put into an infrastructure bank to build a new American economy."

The statements, reported by Bloomberg at the time, were especially topical since the U.S. Justice Department was on the verge of announcing a $13 billion settlement with JPMorgan over mortgage fraud, concluding months of negotiations that had been covered exhaustively by the press.

Hardly anyone is focused on the Clinton proposal today and even a former senior adviser to Clinton waved away the idea as impractical. Clinton himself wasn't available to speak with TheStreet.

"I doubt if Clinton's proposal will go through and I would be reluctant to support it. Earmarking is not really good fiscal policy and one wonders why are you using financial sector fines to fund infrastructure?" wrote Martin Baily, a Brookings Institution fellow and chairman of the Council of Economic Advisers during the last two and a half years of the Clinton administration, in an email exchange with TheStreet.

Still, many Americans might find investing in infrastructure more meaningful than simply sending the money to the U.S. Treasury Department for general expenditures, which is where a significant chunk of it goes. Much of the rest isn't cash at all but credits banks earn for modifying mortgages, an activity that is in the banks' interest anyway. TheStreet explains the credit system in more detail in part one of this series.

What's more, while the need for mortgage relief remains great, the most obvious victims of the fraud committed by the banks were investors. But investors have seen relatively little of the money banks have paid in penalties to the government.

"Instead of giving any money to the people who lost money by buying these loans, they want to give the money to the government and presumably to homeowners who created the problem by taking out the loans in the first place," said Rafferty Capital Markets analyst Dick Bove, a prominent critic of the regulatory crackdown against banks that has followed from the financial crisis.

Bove supports President Clinton's idea, however.

"It's a more positive use for the funds. It meets a specific need and there's a specific result," he said.

Most of the largest legal settlements between banks and the U.S. government have been tied to mortgage abuses. That figure stands at about $65 billion, though it is expected to jump by more than $16 billion assuming the Justice Department reaches a much-anticipated settlement with Bank of America. At least 11 more mortgage settlements are in the works.

In addition to penalizing banks for mortgage abuses, the Justice Department has levied fines of $8.8 billion on BNP Paribas and $1.9 billion on HSBC (HSBC) over money laundering.  Another $2.6 billion fine has been levied against Credit Suisse (CS)  for helping clients evade U.S. taxes. UBS (UBS) also paid $1.5 billion after it pled guilty to manipulating LIBOR, or the London Interbank Offered Rate, which is used to peg a number of other interest rates including those used by mortgage lenders and credit card companies.


While a policy expert may fail to see a link between financial sector fines and infrastructure investment, the connection seems a natural one given a broader economic perspective. That is because U.S. financial sector growth has been accompanied by a decline in infrastructure investment and a persistent shrinking of the American middle class. Channeling funds from financial sector abuses into infrastructure spending suggests a badly needed reordering of national priorities. The U.S. hasn't made significant infrastructure investments since it built the federal highway system in the 1950s and '60s. It now spends half as much of its GDP on infrastructure as most European countries, according to The Economist. Meanwhile, the number of mutual funds has tripled from 1990-2012. 

Rep. John Delaney (D., Md), a protege of President Clinton who has made increased infrastructure spending his major legislative priority, told TheStreet he believes President Clinton's idea is purely pragmatic.

Delaney has not spoken to Clinton about his idea of spending bank fines on infrastructure, but he believes Clinton "understands that the way Washington is currently structured from a fiscal perspective is that you can't make investments like infrastructure unless you pay for them." This is despite considerable data showing that infrastructure spending pays for itself through increased economic activity.

While Delaney doubts that Clinton sees a long-term connection between policing the financial sector and rebuilding U.S. infrastructure, "he does believe we need to launch an infrastructure bank and he's been supportive of a lot of ways of funding it and I think he views this as potentially a way of funding it as well," Delaney said.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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