If anything, the foreclosure fraud settlement has shown a breakdown in the ability of regulatory agencies to deal with the aftermath of fraudulent conduct. They simply have no ability to offer a regulatory response that’s commensurate with the behavior. If the behavior does lead to a negotiated settlement, then it comes with unsatisfying “neither admit or deny” statements that judges have continued to question:
Judge Renee Marie Bumb of United States District Court in Camden, N.J., blocked a proposed settlement on Wednesday between the Federal Trade Commission and a marketing company based in New Jersey on charges that the company and its chief executive made false and unsubstantiated claims that the use of açaí berry-based products, which they promoted, would result in rapid and substantial weight loss.
Judge Bumb ordered both the commission and the company to justify why she should approve the proposed $11.5 million settlement when the lack of an admission by the company and the executive of any wrongdoing left her with no facts with which to judge whether the negotiated deal was fair, adequate and in the public interest.
In doing so, she cited a much-discussed case involving the S.E.C. and Citigroup. Last November, Judge Jed S. Rakoff of Federal District Court in New York rejected a proposed $285 million settlement of securities fraud charges for the same reason: without an admission of guilt or agreed-upon facts there was no basis for an approval.
Judges are starting to challenge the “neither admit or deny” settlement all over the country. And the SEC’s response has been that they can’t force companies to admit wrongdoing in fraud cases, because then they would be liable for civil charges. You can see the worldview here, and the instinct for protection that the SEC has over the companies they’re supposed to regulate.
As troubling as the language is, regulators point to the significant penalties they extract in settlements. Except in many cases they don’t get the penalties at all:
Like many banks engulfed by the mortgage crisis, First National Bank of Nevada specialized in risky home loans that didn’t require borrowers to prove their incomes. When the housing bubble burst, First National got crushed in 2008 under the weight of bad loans that it could no longer resell to investors.
Last year, the Federal Deposit Insurance Corporation sued two former senior executives of the defunct bank for alleged negligence and breach of fiduciary duty, hoping to recover nearly $200 million in losses that it tied directly to those executives’ decisions. The two men denied wrongdoing and settled for $40 million.
But they didn’t pay a dime.
Instead, the federal agency – which is better known as a regulator that seizes control of failing banks and provides deposit insurance for consumers than for its prosecutorial endeavors – is still fighting in court to collect that money from Catlin Group Ltd., a Lloyd’s insurance syndicate. Catlin provided an equivalent of malpractice insurance to First National’s executives, but the insurer denied liability for the executives’ alleged mistakes.
This happens far too often, and not just to the FDIC. Settlements like the Countrywide case resulted in a tiny percentage of the anticipated result getting paid out.
This is why the foreclosure fraud settlement, explained in perhaps the best fashion by Barry Ritholtz in a must-read, is so corrosive. It exhibits the worst qualities of our regulatory state in the 21st century. And it puts a price on conduct that undermines the 300-year property system in the United States, turning fraud into a business expense. Here’s just a little from Barry:
The bigger issue is the economics of criminality. Most people who get caught committing crimes are punished. Commit a felony — if you run a bank — and your shareholders pay a monetary fine. Violating the law has merely become the banker’s cost of doing business.
Thus, the robosigning agreement has allowed the mass production of perjury. It has gone unrecognized and unpunished. It has made perjury a business expense, like travel or office furniture. The same reckless approach to giving loans to unqualified people was institutionalized, leading to another reckless approach to foreclosing homes.
We still don’t know who ordered these crimes, who is responsible for this, whether they still are in their jobs — or whether they are in a position of authority to do the same thing again.
Last, politically, the settlement reveals the corrupting influence of bank bailouts. Government is supposed to enforce laws equally and fairly. Instead, it is protecting its investments in rogue banks. They are committed to their original error and are loath to admit it. This is the reason that after a surgical accident, a new surgeon does the repair. He is objective and has nothing to hide. Conflicted governments, though, are focused on their reputation and reelection.
We have to be more concerned by the fact, given all the evidence, that the regulatory state under its current leaders cannot do better than this. Or rather, it quite easily can, but will not.