Wouldn't it be great if we lived in a world where people paid for all of their mistakes? Bank of America investors sure must think so. Earlier this week, they learned that the institution would pay $8.5 billion to settle some claims by investors that it should have bought back souring mortgage bonds issued by Countrywide, which it purchased in 2008. This raises a question: should the bank claw back the bonuses it paid the employees responsible for the mistakes that led to the big settlement?
Eleanor Bloxham, CNNMoney contributor and CEO of The Value Alliance and Corporate Governance Alliance, thinks so. She writes:
But this $8.5 billion settlement -- in real cash, not just paper accounting losses -- brings some very large questions to the fore. What about all the executives who made bonuses based on the sale of those securities? And what about the executives who conducted the due diligence on Bank of America's purchase of Countrywide, which led them to take on this multi-billion dollar headache?
It sure would be nice if they could be on the hook for the big loss Bank of America faces, but we shouldn't expect to see this happen. As Bloxham goes on to explain, the bank doesn't appear to have legal authority to seize past pay for this reason, unless it can prove fraud. Should banks have the capability to seize past bonuses in a situation like this?
Maybe, but we can't be sure that this would have really helped. The transgressions we're talking about here don't appear to have deviated significantly from normal market practice at the time. That's why other banks face similar complaints by investors. So even if clawback consequences were in place, these mortgage bankers might not have behaved differently: they probably didn't think that they were doing anything wrong.
As for the due diligence team, it's not at all clear that these individuals made any mistakes in what they were supposed to do -- their scope of services might not have required them to analyze whatever problems led to the putback issue. And even if they had found something, the situation might not have turned out much differently. At the time, Bank of America seemed fairly confident that a Countrywide acquisition would ultimately benefit the institution. That may still turn out to be correct. It knew going in that there were unforeseen risks involved with an acquisition like this, but it went ahead anyway.
Finally, the amount of money that could even be clawed back from this small handful of individuals would also be pennies compared to the massive settlement amount. Those who made the mistakes weren't likely all heavy hitters making multi-million dollar bonuses, and the universe of employees who had knowledge of the issue is pretty small. Even if it resulted in $20 or $50 million in recoveries, that's nothing compared to $8.5 billion. This would be like someone totaling your car and buying you new floor mats as compensation.
Read the full story at CNNMoney.