The Banks Win Again

Last February, the big banks agreed to a major “settlement” to protect themselves from litigation by state attorneys general stemming from fraudulent documentation of mortgages. Though some, such as New York’s crusading attorney general Eric Schneiderman, believed that the government had leverage to get a lot more, the settlement required the banks to pony up some $25 billion to settle outstanding charges.

The banks, without admitting wrongdoing, agreed to reform fraudulent practices, such as “robo-signing” and proceeding with foreclosures on one track while supposedly helping borrowers to adjust terms on another. The settlement reserved the government’s right to continue criminal prosecutions.

But there was a lot of double counting of funds already committed, and at the end of the day the banks parted with only a few billion dollars in new money, precious little of which went to relief of damaged mortgage holders. Only about $2.5 billion has found its way to actual principal reduction, to just 22,000 homeowners out of some ten million at risk of foreclosure.

As part of the deal, Schneiderman was made co-director of a federal task force on banking and mortgage abuses headquartered at the Justice Department. Schneiderman’s frank hope, expressed to me and other reporters, was that the leverage of increased prosecution efforts would compel the banks to part with a lot more money in a second round of settlement talks.

But now, the other shoe has dropped and the banks have won again.

In the settlement announced Monday between the Federal Reserve, the Comptroller of the Currency and ten of the largest banks and other mortgage providers, the government gives up the right to prosecute banks for past wrongful foreclosures. In exchange, the banks part with another $8.5 billion, of which $5.2 billion is for loan modifications and $3.3 billion is for people whose mortgages were wrongfully foreclosed.

It’s a pittance. With 3.8 million homeowners covered by the settlement, that works out to less than $2,000 per homeowner.

The Comptroller, a division of the Treasury, has long been the most captured of the regulators. The strongest of the Federal bank regulatory agencies, the FDIC, was not a party to this deal, nor was Schneiderman.

His hoped-for major prosecutorial task force at the Justice Department has turned out to be a few dozen people. It’s now clear that no major figure in the worst and most fraudulent financial collapse since the Great Depression will face criminal prosecution. That’s for one-off hedge fund guys who got caught trading on insider tips, and other small fry. In a turnabout, AIG, whose machinations helped crash the economy and got almost $200 billion in bailout aid, is now threatening to sue the government

Apart from the injustice of the slap on the wrist to banks, there is a serious economic consequence to this lame settlement. The scale is so meager that it will have no real effect on the continuing mortgage crisis, in which 22 percent of America’s homeowners still have mortgages worth more than the market value of their homes.

As long as this is the case, a weak housing sector will continue to drag down the recovery. The paltry mortgage remedies reflect the persistent influence of the banking industry on the Obama Administration. The Administration’s primary goal is still to protect bank balance sheets, not homeowners. And that will continue, if, as expected, White House chief of staff Jack Lew is named to succeed Tim Geithner at Treasury.

If the economy is still stuck in second gear by the 2014 mid-term election, Democrats will pay dearly at the polls, just as they did in the mid-term of 2010—and Obama can forget about a legacy of a strong second term. Live by feeble reforms, die by feeble reforms.

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