Many of the nation’s largest banks have, in the last few weeks, signed settlements with the federal government over a variety of foreclosure abuses. Bank of America, Goldman Sachs, and Morgan Stanley will all be paying up, as will a slew of other banks who joined an $8.5 billion settlement.

However, tucked away in these settlements is a problem: the costs are tax-deductible. As the New York Times’ Gretchen Morgenson explained, “the banks can claim them as business expenses. Taxpayers, therefore, will likely lighten the banks’ loads.” At least two U.S. senators think that taxpayers shouldn’t have to cover the cost of the banks’ mistakes:

“The government is abetting the behavior by not preventing the deduction,” said Sen. Charles Grassley, R-Iowa. “The taxpayers end up subsidizing the Wall Street banks after the headlines of a big-dollar settlement die down. That’s unfair to taxpayers.” [...]

At least one lawmaker, Sen. Sherrod Brown, D-Ohio, wants regulators to bar the tax deductibility of the lenders’ costs. Brown made his argument in a letter to Federal Reserve Chairman Ben Bernanke, U.S. Comptroller of the Currency Thomas Curry and other top regulators. The Fed and the comptroller’s office, a Treasury Department agency, negotiated the foreclosure abuse settlements with the banks.

“It is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing,” Brown wrote in the letter dated Thursday. “Breaking the law should not be a business expense.”

The latest round of bank settlements has already been panned by critics for letting banks “sweep past abuses under the rug.” And now taxpayers are subsidizing the slight cost that the banks will be paying.

Deutsche Bank, like many major banks on both sides of the Atlantic, is under investigation for manipulating the LIBOR interest rate, which governs financial transactions the world over. German officials are “conducting a so-called special probe — the most severe form of investigation it can undertake — into Deutsche Bank as part of a broader global investigation of interbank lending rates.”

According to the Wall Street Journal, Deutsche Bank made $654 million trading on LIBOR and other interest rates in 2008. And one former employee says that the bank’s executives blew off warnings about the riskiness of such trades because “the bank could influence the rates they were betting on”:

The interest-rate bets included an estimated potential profit of €24 million for each hundredth of a percentage point that the three-month U.S. dollar Libor increased compared with the one-month U.S. dollar Libor, according to the documents.

The former employee has told regulators that some employees expressed concerns about the risks of the interest-rate bets, according to documents. He also said that Deutsche Bank officials dismissed those concerns because the bank could influence the rates they were betting on.

Two major banks — Barclays and UBS — have already settled with regulators over charges stemming from LIBOR rigging.

The deal to avert the so-called “fiscal cliff” — which President Obama signed into law yesterday — included a host of corporate tax breaks, including breaks that benefit NASCAR and rum producers. As the Financial Times reported, another break will benefit big banks that park money overseas:

US banks and other large cross-border companies will retain a key tax break covering billions of dollars in foreign income under this week’s fiscal cliff deal.

Extending the so-called “subpart F exception for active financing income” will allow multinationals to defer paying US taxes on certain financial transactions undertaken outside the US. The companies are taxed by the US on that income only when it is brought back to the country. [...]

Companies including Bank of America, Bank of New York Mellon, Citigroup, General Electric and JPMorgan Chase have banded together to form the Active Financing Working Group, to lobby for renewing the exemption in recent years.

The group has paid $1.03m to lobbying firm Elmendorf Ryan since 2009 to campaign for the tax break to be extended, according to the Center for Responsive Politics.

Extending the exemption will cost the US Treasury some $9.4bn in lost revenue in 2013, according to estimates from the Senate Joint Tax Committee.

As Citizens for Tax Justice explained, “The active financing exception makes it easier for multinationals to expand overseas, making investments and creating jobs in foreign countries rather than here in the U.S., by reducing the related tax costs.” CTJ added, “The active financing exception also plays a significant role in the ability of large U.S.-based financial institutions to pay low effective rates.”

Meanwhile, the fiscal cliff deal allowed a cut in the payroll tax to expire, raising taxes on every working American. The deal will reduce U.S. economic growth by about 1.3 percent this year.

UBS and Barclays have both been fined more than $1 billion by regulators for manipulating the LIBOR interest rate, a key global benchmark. UBS bankers were caught in emails bragging about the “fu*king humongous deals” they were arranging by gaming LIBOR.

LIBOR rigging could have affected Americans of all stripes, sucking funds from the cities they live in and hurting the pension funds that hold their retirement savings. And as the Wall Street Journal reported, American taxpayers may lose up to $3 billion due to LIBOR rate rigging:

Fannie Mae and Freddie Mac may have lost more than $3 billion as a result of banks’ alleged manipulation of a key interest rate, according to an internal report by a federal watchdog sent to the mortgage companies’ regulator and reviewed by The Wall Street Journal.

The unpublished report urges Fannie and Freddie to consider suing the banks involved in setting the London interbank offered rate, which would add to the mounting legal headaches financial firms such as UBS and Barclays face from cities, insurers, investors and lenders over claims tied to the benchmark rate. [...]

Analysts from the inspector general’s office said in the internal report, dated Oct. 26, that Fannie and Freddie likely lost more than $3 billion on their holdings of more than $1 trillion in mortgage-linked securities, interest-rate swaps, floating-rate bonds and other assets tied to Libor from September 2008 through the second quarter of 2010, which the report says was the height of banks’ alleged false reporting of the interest rate.

As Reuters’ Alison Frankel wrote, “The drive for profits in people like the UBS traders and their brokerage conspirators, as described in the FSA filing, is obviously more powerful than any qualms about morality or fear of being found out. That’s why moaning about Dodd-Frank whistle-blowers or duplicative actions against the banks rings hollow.” Federal regulators, including Treasury Secretary Tim Geithner (then president of the Federal Reserve Bank of New York), reportedly knew about LIBOR rate rigging as far back as 2008.

The Swiss bank UBS will pay $1.5 billion in fines to international regulators for manipulating the LIBOR interest rate, which helps set rates on financial products across the world. UBS is the second bank, after Barclays, to pay fines for messing with LIBOR.

According to emails released by the British Financial Services Authority, UBS traders bragged over email about their work rigging the interest rate, promising to do “fu*king humongous deal[s]” with each other if the rates were rigged a certain way:

The trader, described in Financial Services Authority documents as Trader A, wrote on instant message exchanges: “3m libor is too high cause I have kept it artificially high.” This single employee appears to have made hundreds of requests to brokers to help manipulate the rate, according to the FSA. At least 45 UBS employees in total knew of, or were involved in, the rigging of the rate, the UK regulator said.

The FSA documents suggest a macho trading culture on the UBS trading floor. Trader A also said: “if you keep 6s [i.e. the six month JPY LIBOR rate] unchanged today … I will ****ing do one humongous deal with you … Like a 50,000 buck deal.”

As Reuters’ Felix Salmon put it, “The $1.5 billion that UBS is paying in fines here is enormous, but it’s not remotely enough.” The emails read much like those circulated by Goldman Sachs when it was busy ripping off customers with self-described “shi*ty deals.”

The Dodd-Frank Wall Street Reform Act that grew out of the housing crisis and financial collapse includes new homeowner protections and a rule aimed at ensuring that borrowers can repay their mortgages. The qualified mortgage rule, also known as “ability-to-repay,” requires lenders to consider whether someone can afford to repay the mortgage before it is issued. In exchange, banks and lenders will get special protections from legal liability in the rule that is scheduled to be finalized in January.

Banks are now pushing to make those legal protections as strong as possible, telling policymakers that they could curb mortgage lending without the new protections, the New York Times reports:

As regulators complete new mortgage rules, banks are about to get a significant advantage: protection against homeowner lawsuits.

The rules are meant to help bolster the housing market. By shielding banks from potential litigation, policy makers contend that the industry will have a powerful incentive to make higher quality home loans. [...]

The legislation mandated that loans be affordable, but Congress conceded that banks might fear the legal consequences if the mortgages did not comply. So lawmakers created a type of home loan that would have legal protection, called a “qualified mortgage.” In practice, the protection will make it harder for borrowers to sue their lenders in the case of foreclosure.

Both banks and consumer advocates favor a broad definition of the qualified mortgage, but they differ in their stances on legal protections. The Consumer Financial Protection Bureau, in charge of writing the rule, has two options: it could provide strong legal protections for banks under a “safe harbor” rule, which raises the standard for a lawsuit, or it could pursue a path that gives borrowers expanded legal rights in challenging banks. While banks argue that they will cut lending without tough legal protections, consumer advocates are skeptical.

Even as they fight for legal protections, banks are still dealing with the fallout of their legal abuses before, during, and after the housing crisis. Before the recession, banks used discriminatory and predatory lending practices, and after the collapse, they have used fraudulent practices to push foreclosures through en masse.

Meanwhile, both Democratic and Republican lawmakers have raised concerns over the biggest banks’ ability to avoid punishment for illegal activity. Prosecutions for financial fraud hit a 20-year low in 2011, and after a recent settlement between the Department of Justice and mega-bank HSBC, Iowa Sen. Chuck Grassley (R) slammed the “get-out-of-jail-free card” many big banks seem to hold. Oregon Sen. Jeff Merkley (D), meanwhile, said America’s biggest banks have simply become “too big to jail.”

In 2010, the nation’s biggest banks were caught systematically forging foreclosure documents in order to speed the foreclosure process along and unlawfully oust homeowners. The resulting scandal led to a $25 billion settlement between the federal government, state attorneys general, and the five biggest banks.

Nevada — arguably the epicenter of the foreclosure crisis — enacted a law (signed by its Republican governor) that forces banks to prove ownership of a home before a foreclosure, punishable with criminal penalties. Now, the state’s banks want to roll back that requirement:

Foreclosures in Nevada could spike next year if lawmakers and banks roll back a bill passed in 2011 that played a large role in stymieing banks’ attempts to retake homes from Nevadans, according to the state’s banking association president and housing analysts. [...]

At issue is Assembly Bill 284, a measure passed by the Nevada Legislature in 2011 and signed by Republican Gov. Brian Sandoval that forces banks to prove they have the legal right to foreclose on a particular home before they take action. Most important, the law requires bank workers to sign an affidavit that they have personal knowledge of a property’s document history, or they will face criminal or civil penalties.

One Democratic state senator responded to the proposal by saying “if banks can’t foreclose, it’s their own fault for losing track of the paperwork.” “If it comes down to a homeowner who had a mortgage, or a bank — who has the right to be there? I’ll go with the homeowner,” said State Sen. Tick Segerblom. “I’m not worried about the banks. They made their beds. They can sleep in it.”

At the federal level, big banks have been gaming the foreclosure fraud settlement, while many states have siphoned off settlement funds meant to aid homeowners to use for other purposes.