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Why a $16 Billion Fine Is Chicken Scratch for a Big Bank

Spare your sympathy for somebody who deserves it.

Photo Credit: Jakub Krechowicz /


Preliminary reports say that a $16 to $17 billion settlement will soon be announced between the Justice Department and Bank of America. That would break the record for the largest bank settlement in history, set less than a year ago by a $13 billion agreement between Justice and JPMorgan Chase.

The numbers that accompany these deal announcements always seem impressive. But how large are they, really? That depends on your point of view.

The Big Picture

Bankers fraudulently inflated a housing bubble. They became extremely wealthy as a result, but the U.S. housing market lost $6.3 trillion in value when the bubble burst. It had only recovered 44 percent of that lost value by of the end of 2013, according to  Zillow's data.

That's more than $3 trillion still missing from American households.

As of the first quarter of this year,  9.1 million residences - 17 percent of mortgaged homes - were still "seriously underwater," which means that homeowners owed at least 25 percent more on the home than it was worth.

And homeowners weren't the only ones hurt by banker misdeeds. When the bubble burst, it took the economy with it. Unemployment and underemployment remain at record levels, even as the stock market surges and corporations enjoy record profits. Compared to the wealth that bank fraud has taken from American households, these settlements are a drop in the ocean.

Righting The Wrongs?

If you're like most Americans, you probably know somebody who's been through a foreclosure or has been victimized by dishonest mortgage practices. You're far less likely to know someone who has experienced meaningful relief from a foreclosure fraud settlement. Why is that?

Payments on those 9.1 million underwater mortgages are a form of wealth transfer from Main Street to Wall Street, as homeowners continue to overpay the bankers who inflated those mortgages in the first place - or risk losing their homes to them. If this added burden harms their credit score, they'll pay banks more for other forms of borrowing as well.

And yet, these settlements do not require banks to provide principal relief for these underwater homeowners. They don't ask banks to return homes that they wrongfully took from their owners. They don't ask banks to forfeit every penny of earnings received through forgery or perjury. They don't even ask them to restore the credit ratings of defrauded customers.

On a broader scale, these settlements don't ask banks to invest in job creation, increase their lending to job-creating enterprises, or refrain from other forms of consumer fraud. Instead they're limited to addressing a very limited set of harmful activities - and don't even fully compensate victims for the harm those activities caused.

Less Than Meets the Eye

What's more, there's very little reason to believe that these large sums will be paid in full. Much of the "consumer relief" in past deals has turned out to be nothing more than gamesmanship with numbers. Banks modify loans in ways that are advantageous to them, offer deals they almost certainly would've offered anyway, and then count them against their "settlement" obligations.

That's the kind of thing that happened with  the much-hyped "$25 billion" foreclosure fraud deal announced in 2012. Subsequent settlements (including last month's "$7 billion"  Citigroup deal) have been vulnerable to the same kind of abuse.

Now the Wall Street Journal reports that $7 billion to $8 billion from the Bank of America deal will be allocated for "consumer relief, such as reducing mortgage balances for struggling homeowners," while $9 billion will go to "the federal government, states and other government entities."

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