Why Don't Fines Affect Finance Firms Stock Price? Part II: The Money
Recently I noted how the regulatory fines do not appear to correlate with the stock prices of the fined entities. I got a lot of good feedback, and the general consensus is that often the investigations by regulators is announced publicly months or more in advance. In other cases the fine has not been expected, but, since it's finance, it's really just expected anyway. These penalties are the cost of being a financial institution and are already boiled into the valuation like the acceptable amount of dry rot in canned beets--5% by weight per the FDA.
This may be true. I find it a little disheartening though. We're not talking about mistakes in accounting or accidentally putting dry rotted canned beets in the candy jar in the branch. We're talking, well, crime, like this:
Citicorp, JPMorgan Chase & Co., Barclays PLC, The Royal Bank of Scotland plc Agree to Plead Guilty In Connection With The Foreign Exchange Market and Agree to Pay More Than $2.5 Billion In Criminal Fines -- Wednesday, May 20, 2015
Which was just the first hit I got by searching "doj banks misconduct egregious." It was Google who helpfully suggested I tack on "egregious."
However, yes, you are correct, in many many cases the institution pays up but "admits no wrongdoing"--which for some reason is showing me pictures of the Pope in search results--so yes, it isn't all legally crime.
Nevertheless, it does feel a bit like a hospital where we do our best, and we value your business, but we're a big place, with a lot of staff, and there are going to be bad apples and so we can't always stop all the doctors all the time from not selling the occasional kidney.
Regardless, this isn't about kidneys or beets, it's about money. And that is where the answer probably lays. The fines aren't that much. Oh, there's a ton of fines. But not compared to the revenues.
I have spent the past many nights lining up penalties with gross income. The former, as I've noted, come from the excellent Violation Tracker. The later came were, surprisingly harder to come by, even for public companies. I scoured through data from macrotrends.net, ychart.com,craft.co, WSJ, Forbes, CNN, Google, Finbox, Propublica, ibanknet.com, company websites, FDIC, FFIEC, NY DFS, and sometimes made educated, conservative, estimates to fill in a missing time period.
Ultimately, I was able to line up 154 financial industry related companies with their fines and revenues. I looked at the time period from January 2010 to July 2022. Here's punchline:
That's a bit less than two quarters and dime for every hundred dollars of top of the line income for the companies I looked at. A full 45% of the companies, 69 of them, paid less than a tenth of a percent of revenue in fines. That's a mere two jitneys for every hundred simoleons, per the Interweb.
That's not going to change any ticker tape feeds being watched by men with top hats and monocles.
You may note that this gigantic sum includes companies like Vitol, which you may never have heard of, but who trades all the oil, has less than 400 employees, made a little over $2.8 trillion(!) since 2010, and paid up around $100 million (does it matter if it was double or triple?) mostly for bribes made in South America, and some other stuff (again, does it matter?). There's also the Bank of China and MasterCard, who, versus revenue paid less than 0.01%, but oh boy, that revenue!
We need to look at the data a bit more closely. Let's look at the top ten fine getters? receivers? finees? Ralph Fines? I digress. The point is, almost no one paid more than 5% of revenue. More specifically, only two companies did: Ocwen Financial and CashCall. And you never heard of them.
Note, I only looked at companies that received $10 Million or more in fines because, as you can see, anything less than that is just white noise in the eardrums of the seashells at the edge of the ocean of cash.
To save you having to pull out your straightedge to triangulate all of this, here's a table I spent too much time formatting.
In other words, if Bank of America was canning beets, they would have still made it under the cutoff of acceptable dry rot--by weight.
What do you think? Is this what you expected? Not the picture of beet dry rot. I'm not thinking you expected that. I mean the amount of fines versus the revenue? Is there another angle that you think I should examine here? Do you want to know more about any of the individual companies or fines?
Lastly, here's some hashtags. Don't use them all up at once: #regulations #doj #sec #finra #cfpb #occ #fed #cftc #fdic #ofac #compliance #enforcement #fines #banks #finance
Data sourced from: Violation Tracker