|While banks are supposed to pay cheated homeowners $25bn, they will actually pay just $5bn [GALLO/GETTY]
New York, NY – Follow the money used to be the mantra of modern journalism until investigative reporting largely went on a hiatus. Now it’s the partnership of money and power that demands our attention.
The case in point, the latest object lesson de jure, is another one of those deals that seems on the surface something we never thought we would see: a deal between five big banks and victims of mortgage frauds that will finally put some money in the pockets of homeowners who became homeless through fraudulent foreclosures.
Never mind that this problem has been known about, and worried about, since at least 2004 when the FBI denounced “pervasive fraud” in the housing market, while admitting they lacked the white collar crime fighting resources to combat it.
Both the Bush and Obama administrations came up with largely ineffectual “relief” programmes, while local courts in collusion with real estate interests rubber-stamped tens of thousands of foreclosures to uphold mortgage contracts in the name of property rights.
US to require banks to pay $25bn in fines over faulty home foreclosures
Banks, other lenders, real estate agencies and insurance companies raked it in while the borrowers watched as the costs rose and their houses disappeared. When it emerged that the legal documents were being blatantly falsified through a technique called “Robo-signing” – phony signatures by forgers and machines – pressure grew to do something.
For the most part, President Obama said the right thing, but did little, as he became increasingly dependent on Wall Street donations packaged by “bundlers” – the same technique used by bankers to “bundle” specious sub-prime mortgage bonds and other financial instruments.
So, the states attorneys general got into the mix with proposed “settlements” that would give the banks et al., an opportunity to pay off law suits and other claims by “settling them”.
Many could not agree on terms, especially when lobbied by the financial services industry that offered political contributions as well as clever formulas to limit their liability.
A few of the states attorneys general, as they are known, held out for stiffer penalties. One of them, New York’s Eric Schneiderman became the politician progressives rallied behind. The Obama administration decided to get ahead of this “justice” train by helping to shape the settlement and even co-opting Schneiderman on to a Justice Department financial fraud task force.
On the surface, the deal looked responsive to what activists have been demanding. Democracy Now reports: “The US Justice Department has unveiled a record ($25bn) mortgage settlement with the nation’s five largest banks to resolve claims over faulty foreclosures and mortgage practices that have indebted and displaced homeowners and sunk the nation’s economy.”
So far so good – but, as in all big news-making deals, the devil is in the details. In this case, as Amy Goodman reported, “While the deal is being described as a $25bn settlement, the banks will only have to pay out a total of $5bn in cash between them.”
Organisations and movements like MoveOn were mostly positive seeing the deal as a glass half full.
Van Jones, an activist-turned administration official, later pushed out by Republican pressure, is a Schneiderman supporter, writing:
Everyone is trying to determine whether this is a good deal or a bad deal.
Here is how I score it. This deal represents small progress on a small problem. Now it’s time to make big progress on the big problem. Don’t count on finding many good points in the deal itself, because there aren’t a lot. In fact, the main win can be found in what’s NOT in the deal.
… Because this settlement limits legal immunity for banks, this deal does not automatically let the banks off the hook for all of their wrongdoing.
Except for a few issues like robo-signing, state attorneys general can still fight for more compensation and relief for the banks’ victims. Government officials can proceed with investigating and prosecuting banks for their role in crashing the economy and the housing market. In other words, the door is still open to solve the much bigger problems we face. Our fight for justice can, and will, continue.
Matt Taibbi, who has covered this issue tenaciously for Rolling Stone was initially positive, but then, in his own words, began “feeling pretty queasy”.
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It feels an awful lot like what happened here is the nation’s criminal justice honchos collectively realised that a thorough investigation of the problem would require resources they simply do not have, or are reluctant to deploy, and decided to accept a superficially face-saving peace offer rather than fight it out.
So they settled the case in a way that reads in headlines like it’s a bite out of the banks, but in fact is barely even that. There will be little in the way of real compensation for struggling homeowners, and there are serious issues in the area of the deal’s enforceability. In fact, about the only part of the deal we can be absolutely sure will be honored in full is the liability waiver for the robo-signing offences.
The New York Times was not cheering from the rafters: “Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the programme is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.”
Leave it to Yves Smith, a brilliant financial analyst and former trader who edits the Naked Capitalism website, to take her scalpel out with 12 reasons why “the deal stinks”.
Here are a few:
1. We’ve now set a price for forgeries and fabricating documents. It’s $2,000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180,000, so the settlement represents about 1 per cent of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust…
2. That $26bn is actually $5bn of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitised loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.
3. That $5bn divided among the big banks wouldn’t even represent a significant quarterly hit. Freddie and Fannie put-backs to the major banks have been running at that level each quarter.
4. That $20bn actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.
5. The enforcement is a joke. The first layer of supervision is the banks reporting on themselves. The framework is similar to that of the OCC consent decrees implemented last year, which Adam Levitin and yours truly, among others, decried as regulatory theatre.
Need I go on? Suffice it say, the mass media is not dissecting this “theatre” the way it should. This is a fraud posing as a reform to ostensibly fight fraud. It will neither bring justice nor jail the banksters who knowingly played financial games with people’s lives.
It does, however, “look” good and will become a staple of a political campaign based on perception trumping reality on every front.
Well, we’ve solved “that” problem!