I got a lot of response to my post on the new federal financial fraud unit (not to be confused with the old financial fraud unit) looking into mortgage origination and securitization abuses. I criticized New York Attorney General Eric Schneiderman for walking into a bear trap, as co-chair of a panel where three of the five committee members have a history of ignoring accountability for bank crimes on the old financial fraud task force. And I feared that this may collapse opposition to the 50-state settlement, which would absolve banks from liability on an as-yet unknown series of issues in exchange for a pittance sum for homeowners, a sum which they may never even see.

First, let’s talk about the settlement. The good news here is that the Justice Democrats aren’t jumping off the boat just yet. Delaware’s Beau Biden reaffirmed his stance against the settlement because he wanted to pursue his own investigations. And California’s Kamala Harris reiterated her stance last night:

Calif. Atty. Gen. Kamala D. Harris’ office has called a proposed $25-billion settlement with the nation’s mortgage industry “inadequate.”

“We’ve reviewed the details of the latest settlement proposal from the banks, and we believe it is inadequate for California,” Shum Preston, a spokesman for Harris, said in a statement. “Our state has been clear about what any multistate settlement must contain: transparency, relief going to the most distressed homeowners and meaningful enforcement that ensures accountability. At this point, this deal does not suffice for California.”

Many analysts consider California’s participation to be key to a strong deal. Harris walked away from talks with the banks last year, saying not enough was being offered by the financial institutions for California homeowners.

Just as important, statements from Democratic pols and activist progressives removed the flush of “victory” and maintained their opposition to the settlement. California House Dems keep pressuring for something more than the settlement offers. The civil rights group Color of Change had a very strong statement that displayed the appropriate skepticism.

While we applaud President Obama for siding with homeowners, taxpayers, and the millions of Americans impacted by the housing crisis, true accountability and real relief depends on the strength and integrity of the investigation and the ongoing support of the White House. We understand the impact the housing crisis has had on Black people and communities of color, and our hope is that this decision will mean that Wall Street banks are no longer allowed to operate above the law. We are resolve in our efforts and will continue to fight for the millions of people around the country who have suffered and continue to endure this housing crisis.

Americans across the country have demonstrated a groundswell of public outrage, and will not be satisfied with an incomplete, corrupt investigation or a weak settlement. There’s clear consensus that the banks should not be allowed to return to business as usual. Going forward, any deal with the big banks must ensure that there will be a full investigation into their disastrous practices and must have a guaranteed minimum amount of money set aside for reducing the mortgage principal of ‘underwater’ homeowners impacted by the foreclosure crisis–any future settlement must make the banks pay the true costs associated with their actions.

Similarly, Progressives United, Russ Feingold’s group, was skeptical.

But the most important information is this: Schneiderman, according to sources, still has space to object to the settlement while agreeing to join the financial fraud panel. In negotiations, HUD Secretary Shaun Donovan and the Administration tried to link the two, but Schneiderman would not comply. And he still opposes the settlement in its current form. “The language we’ve seen would release claims we are not prepared to release,” one source said.

Schneiderman may look at a settlement if the release is incredibly narrow, more narrow than it is right now, and it doesn’t hinder the investigations being done at the state and federal level (the release has narrowed since the initial offer in August). There’s also the question of enforcement, and whether the settlement will have an actual independent monitor, with real fines for violations. You can see by Schneiderman’s words yesterday that he is making a distinction between pre-crisis conduct and post-crisis conduct, and he simply feels the banks have more exposure on the pre-crisis conduct, which would be the focus of the state/federal probe.

“We’re undertaking a more coordinated effort to pull together all of the various strands of investigations relating to the conduct that created the mortgage-backed securities bubble and led to the market crash,” Schneiderman told reporters in Washington after an event at the Consumer Financial Protection Bureau [...]

He said the new unit, part of the existing federal Financial Fraud Enforcement Task Force, would go after “every aspect of the conduct that created the bubble and crash,” including the origination of mortgages and the packaging of them into securities [...]

Schneiderman said Wednesday that the new unit’s efforts shouldn’t affect the foreclosure settlement talks because those investigations deal with conduct that took place after the housing market collapsed.

“The multi-state talks all relate to post-crash conduct. These are abuses in the foreclosure process,” he said. “Our working group is focusing on the conduct related to the pooling and creation of mortgage-backed securities…the conduct that created the crash, not the abuses that happened after the fact.”

I always thought the point of focusing on robo-signing was that the banks, through depositions and court documents, were dead to rights on those issues (not to mention that they were more recent, and so statutes of limitations didn’t come into play), and that they could be leveraged into a comprehensive deal that gives homeowners what they need, with sufficient penalties on the banks. What Schneiderman seems to be saying here is that, no, it’s the pre-crisis stuff on securitization where the banks REALLY have the exposure, and going after them on that will create the desperation moment where the banks agree to whatever terms are necessary for homeowners.

I’m not sure I totally believe that, and I think giving up the more recent fraud – which is ongoing – is very risky. So is going into the lion’s den and partnering with the likes of Tony West and Robert Khuzami and Lanny Breuer, when their conduct as regulators and investigators speaks for itself.

Here’s what my sources say about that aspect of things. The panel was attached to the existing financial fraud task force because it didn’t require a new executive order. It gives the New York AG new resources that he can take to his state to pursue claims under the Martin Act. In other words, if things are found out by the investigation, and it fits better under New York statutes rather than the federal ones, Schneiderman has that flexibility. If the state statutes on mortgage origination, for example, have run out, the federal origination statutes can be employed. In a best-case scenario, this investigation puts a lot of people on the case, and gives Schneiderman every tool to operate in that context. There may even be other AGs eventually named as part of this panel. I am also told that Schneiderman has some suits ready to release in the coming weeks.

What about a worst-case scenario, though? What if this is, as I suspect, an attempt by the Administration to ring-fence Schneiderman, to slow-walk these cases, and to bottle up any accountability in committee? Sources, who preferred to speak off the record, made this commitment: if the investigation is going in that direction, the New York AG will walk away. And not only that, he will walk away in the most showy, public manner possible, letting everyone know who was responsible for the lack of prosecutions. At that point, Schneiderman can go back and use his own resources and statutes, which while perhaps less flexible than what a state-federal partnership can do, are nonetheless potent.

So that may become a factor on the investigation panel. The White House already has felt the sting of being called out for their lack of response to the financial crisis. Perhaps (I’m not sure I believe this) they want to rehabilitate their own credibility in this area. It is an election year, and polling does indicate that the public wants a much stronger response.

Two other positives here: the press is not totally buying that this investigation will do much good. The New York Times editorial board was somewhat skeptical this morning, as was Dan Morain in the Sacramento Bee. McClatchy’s story interviewed plenty of skeptics. The White House cannot open a magic task force and expect anyone to believe they will actually put words to action anymore. They have to prove it.

The other good sign is that bankers think the task force might mess up the 50-state settlement. More to the point, I think we can infer that an announcement of an origination and securitization probe means that releases on those (which were in the document at one point) won’t be coming, making it less attractive to the banks to settle. Jamie Dimon was freaking out about this today.

“It has a pretty good chance of derailing it,” Dimon said in a televised interview with CNBC from Davos, Switzerland on Thursday [...]

“I think it would be better for America if that settlement took place,” Dimon said. “If this thing derails that, so be it.”

We all know that Dimon wants what’s best for America.

I stand behind what I wrote yesterday. I also can see some path where this task force is not harmful and, in an absolute best case, helpful in bringing accountability and justice. The key for Schneiderman is to maintain his independence. A lot of people walk into Washington thinking they can outsmart people and work on their own terms. It doesn’t always work out. The grassroots will be a powerful spur in this. They need to not spike the ball in the end zone and continue to do what they have been doing, forcing the White House into uncomfortable positions and blowing up an insufficient settlement.