How to Score a Foreclosure Fraud Settlement Deal


 Once again we're hearing that a foreclosure fraud deal is about to be announced between major banks, the US government, and most or all of the states. We've heard that before, only to have the deadline pushed back so that holdout Attorneys General can be brought on board with the agreement. 

Deal, or no deal? We're not sure, but it's certainly possible we'll hear something today, tonight, or tomorrow.

How will we know if it's a good deal for the American people? After all, this is an issue with a lot of moving parts. It includes all of the states and multiple agencies within the Federal government, and involves a multitude of allegations involving several different kinds of crime that come under different jurisdictions. Even the statutes of limitations are a moving target.

That doesn't mean we don't know enough to judge the deal, if and when it's announced. There are well-established facts to guide us, and the principles involved are clear.

Moral and Legal Context

We keep hearing about what is and isn't possible, practical, or politically feasible. Media discussions of the topic keep mixing the quotidien problems of the process with the underlying principles involved. So let's take a second to perform a moral and legal reset and put this issue in the right context.

Legally, banks stand accused of securities fraud, investor fraud, racial discrimination, tax evasion, defrauding borrowers, and perjury (in the filing of false "robo-signed" documents). Each of the major banks has already settled charges with the SEC involving these crimes and more.

Banks committed a number of moral offenses, too, some of which may also have been illegal. Here's a quick overview:

We know that bank executives fueled the housing bubble, convinced borrowers to take out loans based on inflated home values, sold deceptively packaged mortgage-backed securities to investors (including state and local governments and working people's pension funds), concealed their true financial situation from investors while taking massive secret assistance from the Federal Reserve, were bailed out by taxpayers, took huge bonuses anyway ...

.... and never even said they were sorry.

That's what we're dealing with here. But if that's the context, how do we evaluate a settlement proposal?

Five Principles

Any deal should be measured against five basic principles: openness, justice, restitution, deterrence, and reconciliation.

Openness: Do we know what happened? Has the truth been brought to light? Do we finally understand what happened to us, why it happened, and who's responsible?

Justice means exactly what it says: Is the deal just? The American people should be able to review it and know in their hearts that justice has been served. The guilty have been held responsible, laws have been upheld, and we know once again that we live in a society of laws.

Restitution: Have those that were wronged been made whole?

Deterrence: Has the punishment been proportional to the crime? Is it severe enough to deter future criminal behavior?

Reconciliation: When major crimes disrupt a nation, the final element is reconciliation -- the restoration of social calm, renewed trust between the parties involved, and a return to confidence in the institutions of government.

These goals may be too much to ask of a single settlement deal, although we shouldn't accept that without a convincing argument. Either way, they form the moral constellation by which any deal should be scored. The fact that we can never achieve perfection - perfect justice, perfect truth, or whatever - doesn't mean we should abandon our search for justice and truth, does it?

So let's take a look at what we know of the proposed deal so far. (We'll update this as further information becomes available.)


A great deal of information has come to light about bank misdeeds. Some has come from excellent shoe-leather reporting. The Financial Crisis Inquiry Commission and the Levin Subcommittee have also provided troves of useful information on the subject.

But there's a lot that we don't know about bank malfeasance, and specifically about the roles of individual executives in condoning, approving, or encouraging these crimes.

Every time I see a banker on television complaining about his industry's bad reputation - and by implication his own - it occurs to me how easy it would be to clear his name: Just subpoena his emails and phone records, especially during the times that his bank was engaged in the fraudulent behavior for which it has already paid huge settlements through the SEC.

Any settlement that prevents further investigation into bank crime should get a much lower score. The ideal settlement would be one where banks agree to cooperate with ongoing investigations as part of the deal.

And remember: Good DAs use information about one or two crimes - in this case there are more than that - to sweat their suspects, and especially lower-level ones, into revealing information about all their criminal behavior. Any settlement that removes this leverage should be scored very low on Openness.

Indicators: Continuation of ongoing investigations; commitment of major Federal resources to the Schneiderman co-chaired Task Force and other investigative bodies.


A lot of people got shafted by the banks: borrowers, mortgage investors, and bank shareholders. Housing Secretary Shaun Donovan suggested this weekend that mortgage investors - many of whom are state and local governments, or the retirement funds of ordinary working Americans - will have to take the lion's share of the loss as part of the deal.

They've already been screwed once by bankers. That could mean the deal does it to them again. And justice isn't served when third parties pay the price for the misdeeds of others.

What's more, government settlements have almost always been paid by the bank itself, which means that shareholders foot the bill. Many of those shareholders bought bank stocks because they'd been deceived by bank executives, who lied to investors and then pocketed their bonuses. Any settlement should force bankers to pay the cost out of their own pockets.

Neither banks nor individual bankers should be given blanket immunity, either civil or criminal.

And speaking of those deceived shareholders: Why haven't any of them pressed their Boards of Directors to fire the executives that drove their banks - and the economy - into the ground? You were deceived once, folks, but there comes a point when it's caveat emptor time.

Indicators: Immunity/non-immunity from criminal prosecution for individuals; immunity/non-immunity from civil suits; financial penalties for individuals.


Borrowers who were misled or defrauded - all of them- must have what was taken from them returned to them. Most official estimates say that homeowners are paying $700 billion in nonexistent value back to the banks, as mortgage payments on nonexistent home value. (I think that number could be low.)

We keep hearing that "greedy homeowners" are to blame, but most of these homeowners believed their banks - and the pundits who reinforced the banks - when they were told that housing values would keep going up. Many homeowners were also misled by bank-friendly appraisers who overstated the value of their homes.

In that context, how much does $17 or $20 or $25 billion achieve in restitution?

Some will argue that the restitution in this settlement should be limited to the harms caused by robo-signing. The strategy should be this: When you have a wrongdoer dead to rights, clear evidence of a crime is leverage. If this settlement doesn't use that leverage - or if it can't, for reasons yet to be revealed - it should leave the door open for future investigations, prosecutions, and/or negotiations.

The deal must also insured that banks themselves don't dispense the funds. That's like asking a pickpocket to go back on the subway and give all the wallets back.

Indicators: Scope of settlement relative to misdeeds being settled; ability for further civil suits; as much as possible, avoid having third parties pay for the misdeeds of others; retain as much leverage as possible to obtain additional restitution.


The principle here is simple: Bankers will keep committing crimes and other misdeeds over and over, until some of them pay a price that's severe enough to make them think twice. Those misdeeds will hurt customers, investors and, sooner or later, the entire economy.

What is price is severe enough? Criminal prosecution and the seizure of ill-gotten gains.

Without the threat of prosecution and the certain knowledge that they'll lose the money they've made if they're caught, bankers will never change.

Indicators: Ongoing criminal investigations; added resources to aid criminal probes; deal is structured so that bankers can be personally fined if found guilty.


South African officials committed many crimes under apartheid. Many observers were astonished by the generosity and clemency displayed by President Mandela and his government after apartheid ended.

But that reconciliation was only made possible because the Truth and Reconciliation Commissions were not empowered to grant forgiveness to anyone who didn't admit what they'd done wrong.

By contrast, banks have repeatedly been able to settle criminal allegations with huge financial settlements in which they "neither admit nor deny wrongdoing." That's unacceptable.

The institutions of government have also been soiled by this process. Most Americans believe that their government has failed them under both political parties, as far as Wall Street is concerned - and they're right. Our faith in government, and in the political process, will not be restored with another unjust deal for bankers.

Indicators: Agreement requires banks to admit wrongdoing; Federal government pledges additional resources for investigation; rules for ongoing behavior are announced which include improved government oversight.

The Real World

The deal has to be negotiated in the real world, not on some idealized Aristotelian plane. We understand that. A 100-percent deal may be impossible.

But remember this: Right now the only ones who have all the facts are the banks. That means that any deal they sign, no matter how aggressive, is better than what would happen if the truth came out.

So the deal must push them, and push them hard.

More importantly, these principles and ideals offer a way to interpret and measure whatever deal is announced. The deal may not be perfect, but it will have to be a whole lot better than the ones that have been proposed over the past few months or it will be completely unacceptable.

The politicians and others who are negotiating this deal understand the "real world" of bankers, bank influence, and obstacles that make it hard work at times to prosecute bank fraud. But the world of justice is the real world, too. So is the world of morality. And those obstacles didn't prevent the conviction of thousands of people after the much-smaller savings and loan scandal of the 1980s.

Our society hasn't become so debased that people have stopped caring about moral principles. Public outrage over Wall Street greed proves that. These angry Americans are part of the real world too - and they'll be watching.

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