Why a $16 Billion Fine Is Chicken Scratch for a Big Bank
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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."
Only the $9 billion is a sure thing - and most of that money will go to government agencies that have a poor record of providing relief to wronged homeowners.
What's more, it hasn't been announced whether this deal, like Citigroup's recent settlement, will be tax-deductible. If so, Americans will get shortchanged at the federal level, too.
Worst of all, nothing in these settlements is likely to dissuade bankers from engaging in similar misadventures in the future. When the New York Timesstudied bank settlements several years ago, it found that banks routinely violated the pledges they made in agreements like these.
Bank of America had engaged in six repeat violations as of November 7, 2011. Since then it's been a party to mortgage-related settlements that include the (allegedly) $25 billion foreclosure fraud deal; a $9.3 billion multi-bank settlement in 2013; and an $8.5 billion agreement with a group of mortgage investors it had defrauded.
Many deals with other big banks were also struck during that time. But there have been no criminal prosecutions of big-bank executives, an omission that Federal Judge Jed S. Rakoff lamented in a recent speech. Rakoff called the lack of prosecutions from the Justice Department and the Securities and Exchange Commission "technically and morally suspect" and characterized the excuses they've given for failing to prosecute as "hollow" and "lame."
Where's the deterrence?
Thanks to Judge Rakoff, who has been one of the unsung heroes of the fight for financial justice, the number of big-bank executives who have been held financially responsible for their fraud no longer stands at zero. The judge recently ordered Rebecca Steele Mairone of Countrywide and Bank of America to pay $1 million for her role in the fraudulent Countrywide scheme known as "Hustle."
As reported in The Street and elsewhere, the name "Hustle" came from the acronym for a program Countrywide called the "High Speed Swim Lane." (We apologize for The Street's headline, which depicts Mairone as a "blonde go-getter," but look forward to its characterization of Bank of America CEO Brian Moynihan as a "hard-charging redhead.")
Congratulations to Judge Rakoff for holding a banker personally liable at last. But here's the problem: Mairone is only one of many fraudsters in the banking industry - and a fine is not a criminal indictment. More than a thousand bankers were convicted after the much smaller savings and loan scandal of the 1980s. At this rate most bankers - a risk-taking bunch by nature anyway - will be tempted to take their chances on not getting a crusading judge like Rakoff.
After all, what's the worst that could happen: that they might have to give back some of their ill-gotten gains? What fraudster wouldn't take a bet like that?
Means, Motive, and Opportunity
Yes, the settlement figures have grown larger, even after accounting for the vaporous nature of "soft money" consumer relief. That's a good thing. But the key matters of motive, means and opportunity still remain largely unaddressed.
The "High Speed Swim Lane" was designed to streamline fraud, and to reward employees for putting as much trashy business on the books as possible without regard for the consequences. In other words, it simply stated openly what has always been implicit in Wall Street's incentive packages. Those packages are changing, but far too slowly. Bankers still have the financial motivation to do wrong.
They also have the means. The ratings "agencies" that were deeply complicit in big-bank fraud are still in place. The government still relies on ludicrous ideas about "self-policing." And bankers still have MERS, the database and false-front company that Wall Street created to avoid state and municipal laws, taxes, and regulations.
MERS is to mortgage fraud what a skeleton key is to burglary, and it's still in the wrong hands.
One last thing: There will be those who suggest that it's unfair to make Bank of America pay a fine that also covers crimes committed by Countrywide, which it acquired in 2008. Countrywide had long been known as the sleaziest bottom-feeder in the mortgage industry. But, as regulators noted in a 2011 lawsuit, Countrywide's CEO thought that at least one bank was more venal and reckless than his own.
The name of that institution? Bank of America.
Spare your sympathy for somebody who deserves it.