Big banks paying major bucks to settle fraud charges — so where does the money go?

Major Wall Street banks are handing over some hefty sums to settle charges that they misled investors about those exotic mortgage deals that helped nearly topple the financial system.

Citi is the latest to pay up. The Securities and Exchange Commission announced Wednesday that the mega-bank will part with $285 million to settle allegations that it fleeced investors by selling them on a complex mortgage product it was secretly betting against. (In an email uncovered by investigators, one Citi trader described the investment as "dogsh!t.")

Citi isn't alone. In July 2010, Goldman Sachs agreed to pay $550 million to settle SEC accusations that it pulled similar shenanigans with a structured financial product. J.P. Morgan Chase, whose CEO, Jamie Dimon, has complained long and hard about regulatory costs in June, paid $153.6 million, to settle similar SEC charges. In all, the SEC says it has recovered more than $1 billion (pdf) from financial companies over misconduct that occurred in the period leading up to or during the 2008 crisis.

Which raises an interesting question: What happens to all that money?

The short answer is: It depends. In some cases, the money is returned to the investors who were victimized. In others, it's given back to taxpayers via the U.S. Treasury's general fund -- just like most tax revenue. And in many cases, it's a combination of the two.

The split usually depends on several factors: A fund for victimized investors -- known as a "fair fund" -- is set up through an elaborate court process, so it comes with significant administrative costs. That means the amount at issue has to be large enough to make it worth doing. And the victims, of course, need to be easily identifiable.

In the Citigroup deal, which still needs to be approved by a judge, the SEC has said that the full $285 million will be returned to investors through a fair fund. The sum represents $160 million alleged to have been unfairly taken, plus $30 million in interest, and a $95 million penalty.

In Goldman's case, harmed investors got $250 million, while $300 million went back to the U.S. Treasury. In J.P. Morgan's, $125.87 million went to investors, and Treasury received $27.73 million.

These settlements from the big banks' recent financial misconduct won't significantly cut into the multi-trillion dollar national debt. But given that the havoc wreaked by Wall Street affected Americans who had never even heard of a collateralized debt obligation, it seems only fitting that taxpayers should be among those who benefit from the deals.