The dirty little secret of those eye-popping fines and penalties the government has been extracting from banks and Wall Street firms for financial wrongdoing is that they cost the firms only a fraction of the top-line numbers.

Now Sens. Elizabeth Warren (D-Mass.) and Tom Coburn (R-Okla.) are demanding that the top and bottom lines be disclosed -- not only what the government and the banks claim the settlements are worth, but what they're really worth. As my colleague Jim Puzzanghera reported, they've introduced the Truth in Settlements Act to do that job. 

For any federal agency settlement larger than $1 million -- and you have to be engaged in some pretty trivial wrongdoing to fall below that threshold -- the act would require public disclosure of how much of the settlement is tax-deductible, and how much involves "credits" for routine conduct.  

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Warren's office points out, for example, that the $25-billion National Mortgage Settlement reached by five big banks in February 2012 actually included $17 billion in credits for routine conduct, such as hewing to mortgage disclosure rules. She might also have mentioned, as we reported then, that the settlement provided cover for another stealth bailout in which the banks settled a $400-million claim from the U.S. Comptroller of the Currency for zero merely by promising to comply with the terms of the mortgage settlement.

Warren and Coburn would insist that when settlement details are kept confidential, the federal agencies explain why. And the agencies would have to make an annual report toting up all their confidential deals.

The measure reflects a rise in public discontent with settlements that look like major penalties but shrivel into wrist-slaps when reality is accounted for. Until now, the battle has been uphill, waged by lonely figures such as U.S. Judge Jed Rakoff, who has tossed a couple of deals out of his courtroom for being too secret and too paltry.

In 2009, Rakoff bounced the Securities and Exchange Commission's $33-million settlement with Bank of America, which involved no admission or denial of wrongdoing. He complained that the deal looked like "a contrivance designed to provide the SEC with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry," and found that the deal "cannot remotely be called fair." The parties had to come back with a more detailed disclosure and a higher number. 

The worst recent example of a settlement that looks tough on the outside but comfy on the inside may be the $13-billion settlement JPMorgan reached with regulators in November over its chicanery in the mortgage securities market. As we observed at the time, the regulators crowed that it was "the largest settlement with a single entity in American history," to quote the Department of Justice.

But it wasn't what it seemed. First, of the $13-billion total, $7 billion was tax deductible by JPMorgan, which could save the company nearly $2.5 billion. Another $4 billion represented a settlement the bank reached earlier with the Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac.

Another $4 billion wasn't a cash outlay, but included $2 billion in forgiveness of principle for homeowners with underwater mortgages -- borrower relief sure to save Morgan money in the long run, for there's nothing more costly for a mortgage lender than having borrowers go into foreclosure. Another $2 billion involved "credits" the bank will receive to bump up lending in low-income communities. 

So what looked like $13 billion really penciled out at around $6.5 billion. Under the Warren/Coburn act, presumably, this would be stated up front without requiring members of the public to do the math themselves.

It's a good start, though it doesn't solve the biggest problem with these settlements. That problem is that they almost never involve indictments of actual human wrongdoers, up to and including the CEOs who oversaw the shenanigans. That's the necessary next step, without which the white collar wrongdoing will just continue. Time for an "Effectiveness in Deterrence Act"? 

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