Chatter increased over the weekend on a long-awaited foreclosure fraud deal between top banks and state and federal regulators, led by the Justice Department and HUD. Yves Smith provides additional details today, including a Constitutional issue over servicers providing modifications on investor-owned mortgages without their consent, a violation of the takings clause of the 5th Amendment. A meeting today in Chicago with representatives of Democratic AGs could be determinative, or a tactic to fake progress without the holdouts – New York, Delaware, California, Massachusetts, Nevada – agreeing to terms. Whatever the case, there is no doubt that we are closer to a settlement than ever before.
Late on Friday I spoke with Simon Johnson, the former chief economist of the IMF and a professor at MIT, who also writes the Baseline Scenario blog with James Kwak. Johnson has been skeptical of the foreclosure fraud settlement. A lightly edited transcript follows:
DD: So we’ve heard about an imminent settlement for a while now. Why do you think we’re in such a crucial stage now?
SJ: I’ve been writing about this for about four or five months. But I do get the sense that the Administration wants to bring closure to this issue now. There’s a chance we’ll see a mention of it in the State of the Union Address, I understand. And my fear is that the Administration wants to go small. The key to this is exempting the banks from legal action. And the dollar amounts thrown around, $20 billion, $25 billion, are too small to give up that level of release from liability.
DD: Talk about that, because it’s hard to explain to someone that $20 billion represents a pittance sum, even though in the grand scheme of the housing market, it truly is.
SJ: Well, just compare it to profits. The banks made hundreds of billions of dollars during the boom phase by ripping people off. Any settlement of this type, you pay over time, over years. The tobacco settlement was structured this way, on an ongoing basis. So you have hundreds of billions made initially, and the $20 billion spread over time coming out of continued profits. I’m not suggesting that the settlement take a certain percentage of profits from the banks. I’m suggesting that you need to have an investigation of the damage caused, and why go small when you have such a strong case for fraud?
DD: Sen. Sherrod Brown made a powerful argument the other day, that much of the settlement would be paid out with other people’s money, because investors in mortgage-backed securities would see their loans modified down, without their consent. These include investors in pension funds and other MBS holders. How do you look at that argument?
SJ: Any time you make a company pay a fine, you’re really hitting the shareholders. You’re certainly not taking the money from the individuals who walked away with cash. There’s no easy mechanism here. This is the trouble we always have with big cases like this.
DD: What about the fact that in 2008, state AGs reached a settlement on Countrywide loans over origination fraud, where Bank of America, its parent, promised to make loan modifications, and as Nevada AG Catherine Cortez Masto put it in an August 2011 lawsuit, BofA almost immediately violated the terms of the settlement, failing to do the mods and continuing to harm borrowers?
SJ: I totally agree. The track record and culture at the large banks is not one of trying to help the customer. In fact, the track record is more along the lines of being abusive. These banks have been damaging to many Americans. We need the people in charge to take a more skeptical view of what the banks will actually deliver, not just what they promise.
DD: Would CFPB be able to play a role in the enforcement, even though this is a state action at the root?
SJ: They can play a coordinating role. But it’s really up to the AGs in the states. Anyway, CFPB has a very defined agenda, and I’d prefer to see them stay on that path. And this isn’t really an issue of consumer protection, but an issue of law enforcement. That’s who should take the lead.
DD: I am reminded in seeing this settlement of your Atlantic article The Quiet Coup, where you talked about a financial oligarchy ruling in America. Does this really reinforce that?
SJ: You know, when I wrote that a couple years ago, people were skeptical of my characterization. Now I get more people coming up to me saying, “You know you had a point.” I mean, just look at how the new White House Chief of Staff is a former Citigroup executive, and he’s replacing a fomer JPMorgan Chase executive, and he replaced a former Fannie Mae executive. The dominance and power of the financial sector is just out of control. They are treated like no other sector in the country. And it has to stop.
I feel like the Administration is arrogant on these issues. We’ll see if it catches up with them in the election. A lot of these swing states have major housing issues. I think the Obama campaign should think about that.