Bank settlements include 'donations' to 'community development' organizations

The Justice Department has celebrated its settlements with major banks for their conduct leading up to the subprime mortgage crisis, and the headlines have trumpeted the staggering total sums: Bank of America $16.65 billion, Citigroup $7 billion, JPMorgan $13 billion. What is less well known is that some of this money—amounting to hundreds of millions of dollars—is designated for "donation" to various "community development" organizations that were neither parties to the case nor victims of the alleged wrongdoing. Investor's Business Daily has characterized these payments as "political payoffs to Obama constituency groups," and Congress is now considering banning this practice with the Stop Settlement Slush Funds Act of 2016.

In addition to the obvious potential for cronyism and corruption, this practice also implicates a constitutional question. The Constitution provides: "No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." If the banks had paid this money to the United States—which is, after all, the plaintiff in these cases—then the money would have gone into the Treasury. And if, subsequently, the president or the attorney general favored using this money to subsidize these "community development" organizations, they would have had to request an appropriation from Congress; doling out such money "without an appropriation . . . violates the Constitution," as the president was reminded just last week. By providing for payments directly from the banks to the organizations, these settlement provisions circumvent the Appropriations Clause and cut Congress out of the loop.

On Thursday, I testified before the Oversight and Investigations Subcommittee of the House Financial Services Committee on this issue, and I supported legislation along the lines of the Stop Settlement Slush Funds Act of 2016. My written statement is available here. The other witnesses were Ambassador C. Boyden Gray of Boyden Gray and Associates, Dr. Paul Larkin of the Heritage Foundation, and Professor David Min of University of California at Irvine Law, and all the testimony was thoughtful and interesting. Video of the hearing and all written statements are available here.