Is Regions Next in Line for Legal Woes?

Up until now, the perp-walk of U.S. banks sued, indicted, and fined over bad behavior stemming from the financial crisis has mainly been comprised of all the usual suspects: big banks like Wells Fargo (NYSE: WFC  ) , JPMorgan Chase (NYSE: JPM  ) , and Bank of America (BAC).

But as more and more of the low-hanging criminal -- or at least decidedly unethical -- fruit gets picked, it was probably inevitable that prosecutors and regulators would turn to the regional banks to see what they were up to in the years surrounding the crash. That's exactly what's happening right now at Regions Financial (NYSE: RF  ) , and chances are it won't be the last regional bank to come under scrutiny.

Here comes the judge
Reuters is reporting that Regions is currently or has been investigated by no less than five federal and state agencies, all of which are examining the possibility the bank misclassified loans that went south during the financial crisis. The investigating agencies include the Securities and Exchange Commission, the Federal Bureau of Investigation, the Federal Reserve, the Alabama Banking Commission, and the Special Inspector General for the Troubled Asset Relief Program (aka, TARP, the official bank-bailout program of the financial crash).

The inquiries are the result of depositions taken for a civil suit, brought by a pension fund investor who claims that "senior Regions executives violated federal securities laws by misrepresenting the bank's financial condition in 2008 and 2009." Regions chief financial officer David Turner gave testimony in the case, as did William Teegarden, a former executive.

Regions announced in August it had "received inquiries and subpoenas from government authorities, primarily about accounting matters from 2009 and earlier, and that its board was investigating into the matter." The Wall Street Journal originally reported the Regions story.

 Spanking the bank
With the kind of housing bubble this country experienced, it stands to reason there was questionable behavior going on at banks beyond the aforementioned giants. As such, these inquiries into Regions might be just the tip of the iceberg for regulatory investigation -- followed by regulatory action -- taken against the nation's regional banks.

If past is prologue, and the regional banks do find themselves next in line for crisis-related legal woes, we can probably expect one or more of the following:

  1. Suits by both civil and state complainants against the banks as a whole.
  2. Criminal prosecutions against individuals, such as traders or other mid-level functionaries.
  3. Big fines.

Of course, big is relative. Swiss banking giant UBS was just fined $1.5 billion for manipulating the LIBOR. But UBS has more than $916 billion in cash on its balance sheet. So while $1.5 billion is big in absolute terms, in relative terms, it isn't. $1.5 billion will not be a crippling penalty for UBS.

But with just $6 billion in cash lying around, a $1.5 billion fine would be a crippling penalty for Regions. A fine of that size, however, is highly unlikely. The point of fines is not to break a bank, but to spank it. As such, regulators and prosecutors, and even civil plaintiffs, set their monetary targets accordingly. Whatever amount, if any, Regions or any regional bank is ever fined will have been coolly calculated not to do too much damage.

This is good news for Regions investors but isn't necessarily a good thing in terms of banking as a whole: As these fines continue to mount up, seemingly with no real and lasting effect on financial culture, banks might start to think that fines, along with maybe a few flunkies sent to prison, are simply the cost of doing business. 

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