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Banks, rule of law, and the state AG settlement [ClearOnMoney]
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Banks, rule of law, and the state AG settlement

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Commentary

Banks, rule of law, and the state AG settlement

10 Nov 2011 by Jim Fickett.

The settlement under consideration between the banks and a majority of state attorneys general would allow the banks to pay a small fine to escape the rule of law. Fortunately, a number of states are opting out. Unfortunately, the Obama administration, the current chief enemy of the rule of law, is pressing for the settlement.

I won't go into details of the settlement here. There are two good recent summaries. One is from the New York Times, entitled, Letting the banks off easy. The core of it is,

The proposed settlement reportedly would prevent the states from pursuing claims against banks relating to fraud or abuse in the origination of loans during the bubble. (In some states, the statute of limitations has expired for bringing challenges for faulty originations but not on all loans in all states.) It would also prevent states from pursuing claims for foreclosure abuses, like improper denial of loan modifications. And it would prevent them from pursuing banks’ misconduct in their dealings with the Mortgage Electronic Registration Systems database, or MERS, a land registry system implicated in bubble-era violations of tax, trust and property law. …

In effect, the legal waivers being contemplated would let the banks pay up to sweep wrongdoing under the rug.

For the settlement to be fair and meaningful, the redress from the banks must be far greater than the $25 billion that has been floated, or the release from legal liability far narrower. The best outcome would be for government officials to do what they should have done all along: develop the strongest possible legal case by fully investigating the banks’ conduct during the bubble and since the crash and then — and only then — talk settlement. In the meantime, the public is being well served by attorneys general who are willing to say that the deal currently on the table is not nearly good enough.

To put the $25 billion into perspective, that is a few months' worth of employee compensation at one big bank, or about 4% of the negative housing equity in America. And, incidentally, it includes $20 billion face value of mortgage assets that are actually worth much less.

A much deeper analysis of the proposed settlement is provided by Adam Levitin at Credit Slips. Here are a couple of key excerpts:

If one takes the [Housing-Market-is-]Too-Big-to-Fail argument seriously, then this is simply the wrong settlement. Instead, we need a global settlement that addresses negative equity and makes the market clear, that clears MERS title, that compensates for wrongful foreclosures and for the harm to society via robosigning. We need a settlement that can put investor claims to rest too.

Alternative, if this is about robosigning, then there shouldn't be any settlement, much less any rush. Instead, we should just see prosecutions, fines, and jail time. …

The settling AGs and federal government would be giving away claims that they have not investigated and therefore cannot possibly value, something the NY and DE AGs noted in a recent op-ed. The Huffington Post has previously reported that the AGs have done virtually no investigation of robosigning (excluding now NY, DE, and NV). And there has been even less investigation of origination claims. Many of the origination claims have statutes of limitations are will expire soon, but these are serious fraud and civil rights claims. They are much, much more serious issues than the mass perjury of robosigning in terms of harms to individuals. …

Here's the question you should be asking the AGs and the Administration: is this going to matter on the macro level? And if not, is it doing justice? A settlement better be doing one or the other, if not both. If it's neither, all this is a little gravy to a handful of random homeowners and some unconvincing political C.Y.A.