Let’s face it. Banks do not hold back in charging customers for even the smallest service they offer. Remember the days of free checking? So they are definitely crossing the line when they charge for services which do not have anything to do with the customer.
That’s what the country’s biggest banks reportedly did for years by paying the California Public Securities Association (Cal PSA) for lobbying services and by making investors foot the bill.  Acting as underwriters for various municipal and state bonds over the period 2006 to 2010, banks such as Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM) and Bank of America-Merrill Lynch (NYSE:BAC) got their lobbying costs reimbursed from the proceeds of the bonds issue, according to industry watchdog Financial Industry Regulatory Authority (FINRA).
While the FINRA’s total fine amount of $4.4 million is peanuts for the major banks, the incident raises concerns about the underwriting fees and associated, indirect costs for both issuers and investors in these bond deals. And it seems likely that we could see future multi-million dollar lawsuits against the banks.
- How Have Total M&A Deals Closed By Major U.S. Investment Banks Trended In The Last 5 Quarters?
- What Was The Share Of Major U.S. Investment Banks In The Global M&A Industry For Q3?
- How Have Equity Underwriting Deals Closed By U.S. Investment Banks Trended In The Last 5 Quarters?
- How Have Debt Origination Deal Volumes For U.S. Investment Banks Changed In The Last 5 Quarters?
- How Much In Equity Capital Market Deals Did The 5 Largest U.S. Banks Underwrite In Q3?
- How Did Major U.S. Investment Banks Fare In The Global Debt Origination Industry Over Q3?
According to FINRA’s statement, the banks used funds generated from investors through the issue of various bonds to pay Cal PSA and then charged these costs to the California-based issuers as part of the underwriting process. Maintaining that “issuers are entitled to know what they are paying for and why,” the fine seeks to reverse these charges while imposing additional fines on the banks. 
The table below summarizes the fine and restitution amount imposed by FINRA on each of the five banks:
|Citigroup||$ 888,000||$ 391,106|
|Goldman Sachs||$ 568,000||$ 115,997|
|JPMorgan||$ 465,700||$ 166,676|
|Merrill Lynch||$ 787,000||$ 287,200|
|Morgan Stanley||$ 647,700||$ 170,054|
|Total||$ 3,356,400||$ 1,131,033|
As is evident from the table, the actual fine for each of the banks is between $600,000 and $1.3 million – definitely not a big deal for these banks who have been facing multi-billion dollar settlements and fines over recent years. However, the fine could have bigger repercussions on the banks, as the clients of the banks’ globally spread investment banking services will likely seek details and clarifications for the underwriting fees they paid in recent years and going forward.
Either way, it means additional expenses for the banks – something that will drive down margins for their investment banking operations as a whole. You can make changes to the chart below to understand the impact of a reduction in margins on Morgan Stanley’s estimated share value.Notes:
- FINRA Sanctions Five Firms $4.4 Million for Using Municipal and State Bond Funds to Pay Lobbyists, FINRA Press Releases, Dec 27 2012 [↩] [↩]