Settling With the Big Banks?!

A quiet storm is brewing on Wall Street as the Obama Administration and the Attorney Generals of 49 states ready themselves to sign a settlement agreement with Wall Street banks that will have the effect of bringing to a close consumer lawsuits and state investigations into the root causes of the subprime mortgage crisis. For a flat-fee lump sum (originally said to be $20 billion), Wall Street banks will agree to pay a collective fine (ostensibly to pay for national loan modifications and consumer counseling), while the 50 states and the Justice Department will agree to end all investigations and lawsuits into the mortgage fraud and subprime recklessness that precipitated the meltdown of 2008.

One Attorney General is standing in the way of this so-called "progress." According to Gretchen Morgenson at the New York Times, New York AG Eric Schneiderman is standing alone in opposition to a deal that he deems excruciatingly premature. Per the NY Times:

"Schneiderman, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal. . . . Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities."

Morgenson reports that the big banks are eager to sign a settlement to put the subprime fiasco behind them. The Obama administration is pushing for the settlement to allow Wall Street banks to have a finite settlement figure in order to plan budgets going forward and to assist homeowners with funds for loan modifications, etc. AG Schneiderman is coming under intense pressure to agree to the settlement but is standing against the agreement recognizing that any settlement figure at $20 billion or less, will woefully undercompensate consumers, pensions, investment funds, etc. for the fraud perpetrated by Wall Street in packaging junk mortgages in triple AAA investment vehicles peddled recklessly to investors.

Matt Taibbi at Rolling Stone writes a scorching post in opposition to the settlement "Obama Goes All Out For Dirty Banker Deal." Therein, Taibbi writes:

"This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline. This deal will also submarine efforts by both defrauded investors in MBS and unfairly foreclosed-upon homeowners and borrowers to obtain any kind of relief in the civil court system."

Taibbi continues: "To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS. So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators."

With Schneiderman standing alone against this settlement, will he cave under the pressure being applied by an administration, other state Attorney Generals and members of the Federal Reserve? Will the big banks get out from under their responsibility for nearly crashing the global economy by writing a check for $20 billion (or less) and simply walk away? Apparently, member of the Federal Reserve believe this is just. According to the New York Times, "Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York who represents the public . . . has criticized Mr. Schneiderman for bringing the lawsuit [opposing easy Wall Street bank settlements]. Ms. Wylde said in an interview on Thursday that she had told the attorney general 'it is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.'"

That a member of the Federal Reserve Bank of New York claims that "Wall Street is our Main Street" and that Wall Street must be supported unless they've done "something indefensible" is astonishing. Apparently, engaging in massive subprime mortgage loan fraud is not "something indefensible."


cross-posted on the Salt Law Blog