U.S. bank penalties now exceed the GDP of most countries

Have they suffered enough?

Following the housing meltdown and the 2008 financial crisis, hardly anybody felt the slightest sympathy for the Wall Street banks that helped cause it all. But six years on, the four biggest U.S. banks alone have paid a whopping price — approaching $100 billion, according to a Yahoo Finance tally — in fines, penalties and various legal settlements. Virtually nobody responsible for the financial crisis has gone to jail, of course, and the penalties they've paid are a fraction of the damage caused by the 2008 crash. Yet the punishments may have reached the point of diminishing returns.

“The banks have turned into a bunch of zombies,” says Roy Smith, a finance professor at the NYU Stern School of Business. “They’ve hunkered down and don’t want to take any type of risk.”

The government’s campaign to punish Wall Street may finally be reaching a climactic phase. The Justice Dept. is reportedly close to negotiating a $7 billion deal with Citigroup (C) to settle allegations Citi defrauded investors by peddling mortgage-backed securities packed with bad loans, without disclosing the risk. The government is reportedly negotiating a similar settlement with Bank of America (BAC) that could run somewhere between $12 billion and $17 billion. If those deals fall into place, most major prosecutions involving the misdeeds that led to the financial crisis will have concluded.

Ordinary people may have stopped following these bank prosecutions, but while nobody was paying attention, the banks ended up getting spanked pretty hard. Here’s the Yahoo Finance tally of the price paid by the nation’s four largest banks since 2009 for troubles related to mortgages and foreclosures:

The combined tally for Bank of America, Citigroup, J.P. Morgan Chase (JPM) and Wells Fargo (WFC) could easily exceed $100 billion by the time all the dust has settled. Wells Fargo (arguably not a “Wall Street” bank, since it’s based in California) is the only member of the big four that hasn’t reached a deal with the FHFA involving overly risky mortgages sold to Fannie Mae and Freddie Mac during the housing bubble. Wells was less involved in that type of activity than other banks, which is why it has fared better since the housing bust. But it could still end up liable for some payback to the FHFA. And most settlements to date don’t preclude other types of lawsuits or prosecutions against the banks, including private suits.

Since astronomical sums pass through Wall Street every day, $100 billion might not sound like a lot of money. But it’s a sizable sum. It’s bigger than the entire economic output of about 120 countries. It would take Apple (AAPL), the nation’s most profitable company, three years to earn $100 billion. Congress, at the moment, is locked in a dispute over how to augment the highway trust fund, which takes in about $40 billion per year in gas-tax revenue but is meant to finance $50 billion worth of highway projects. So that $100 billion is 10 times the annual shortfall in a key federal budget category.

The big banks can survive huge penalties that would swamp other firms for a couple of reasons. First, they don’t have to pay all the money out in cash. Some of it is in-kind benefits to customers, meant to compensate people for mortgage or foreclosure abuses. To the banks, that’s more like a wholesale cost than a retail cost. Banks can sometimes spread out the cost of penalties over time, minimizing the financial hit. Since the abuses mostly occurred between 5 and 10 years ago, banks have had time to build up reserve funds to help cover legal losses. And since the financial crisis ended, the big banks have actually gotten bigger, consolidating their revenue streams in certain areas, which improves profitability and helps offset settlement costs.

As bank prosecutions wind down, the obvious question is, what did they accomplish? Virtually none of the senior Wall Street executives who led their firms toward bankruptcy and helped crater the entire financial system have been prosecuted for criminal wrongdoing. Exactly one Wall Street executive did jail time for his part in the crisis, and he was a relatlively low-ranking trader. Critics routinely deride the government strategy of attacking companies — which inevitably harms shareholders and employees, most of whom had nothing to do with the crisis — in lieu of prosecuting individuals who committed or encouraged the worst abuses. The problem is, Wall Street honchos are thoroughly lawyered up, criminal activity is hard to prove and the government simply has better odds of extracting civil settlements from corporations that would rather write a check than see their executives — even retired ones — go to jail.

Government prosecutors often argue that stiff corporate penalties deter other firms from engaging in misbehavior that could bring similar punishment. There may be some validity to that. “If you look at the biggest fines, some companies are changing their corporate behavior,” investor Barry Ritholz told Yahoo Finance recently. “A lot of this is just, ‘let’s clear this out so we can get a fresh start and move forward.’”

At the same time, however, the government is putting the squeeze on the very same banks it wants to ease up on lending standards and provide more credit to businesses and consumers, to help boost spending and growth. “Banks are not providing the support we need for the economic recovery,” says Smith. ”There may be a political value to punishing the banks for reckless behavior, but there has to be some sense of political closure on this.”

That could come in 2015, if Attorney General Eric Holder departs after the upcoming midterm elections, as some political analysts expect. Holder has pushed hard to restore the government’s credibility as it prosecutes banks, in the aftermath of porous regulation that allowed some of the worst abuses to happen and the deeply unpopular TARP bailouts, which left many Americans feeling that Wall Street, rather than Washington, was running the country. At this point, neither seems like a good option.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.