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Eric Holder Puts Corporate Dope on the Table

Yesterday, Attorney General Eric Holder announced the latest [1] in a series of massive, multi-billion-dollar settlements extracted from Wall Street’s largest banks as punishment for their role in the subprime mortgage bubble and bust that played a role in collapsing the economy in 2008. Charlotte-based Bank of America, paying for the sins of its own lenders as well as those of investment firm Merrill Lynch and subprime specialist Countrywide (both of which it acquired during the 2008 crisis), will be paying a record $16.65 billion settlement, including an also-record $9.65 billion in cash. This follows last month’s Citigroup settlement [2] of $7 billion (including a then-record $4 billion in cash), and last fall’s $13 billion JPMorgan Chase settlement [3].

The numbers are truly eye-popping, and the repeated use of “record” has a nice, satisfying ring to it. But, just before the latest BoA settlement was announced, William Cohen denounced [4] the entire exercise as “fine theater with the obvious caveat that nothing even remotely close to justice had been served.” Far from being impressed by the sums involved, Cohen sees the settlements as hush money, paid by Wall Street executives eager to keep the details of their worst behaviors out of the public eye.

The American people are deprived of knowing precisely how bad things got inside these banks in the years leading up to the financial crisis, and the banks, knowing they will be saved the humiliation caused by the public airing of a trove of emails and documents, will no doubt soon be repeating their callous and indifferent behavior.

Instead of the truth, we get from the Justice Department a heavily negotiated and sanitized “statement of facts” about what supposedly went wrong. In the case of JPMorgan, the statement of facts was 21 pages but contained little of substance beyond the fact that an unidentified whistle-blower at the bank tried to alert her superiors to her belief that shoddy mortgages were being packaged and sold as securities. Her warnings went unheeded and the mortgages were packaged and sold all the same.

JPMorgan’s CEO and famed finance guru Jamie Dimon reportedly made a personal call [3] in the lead-up to a federal lawsuit being filed in order to bump his settlement offer by, ultimately, $10 billion dollars, hoping “the meeting would avert the lawsuit, which threatened to spotlight the bank’s questionable mortgage practices before the financial crisis.” The $13 billion was, the Times reported, half of one year’s annual profits for the bank.

Indeed, the Times followed up yesterday to show how even Bank of America [5] was getting off lighter than the numbers might make it seem at first blush. “At issue is how much of the cost of the $7 billion in ‘soft dollars,’ or help for borrowers, the bank will bear under the settlement,” the Times said, as writing down principal on loans may have already been factored into BoA’s plans, or they may not even own the loans anymore, having sold them off in the infamous mortgage-backed securities. The investors who bought the bad bonds “note that the government promotes the settlements as punishment for dumping faulty loans on investors, but it devises deals that saddle investors with some of the costs.”

And in a rather perverse function of intersecting laws,

The actual pain to the bank could also be significantly reduced by tax deductions. Tax analysts, for instance, estimate that Bank of America could derive $1.6 billion of tax savings on the $4.63 billion of payments to the states and some federal agencies under the settlement. Shares of Bank of America jumped 4 percent on Thursday, suggesting investors believe that the bank could take the settlement in stride.

Moreover, the Justice Department and states began to get creative in their negotiations with BoA,

In New York State, for example, Bank of America has agreed to donate hundreds of foreclosed properties to land banks and community groups, while chipping in money to renovate each property.

Such measures are also popular with politicians. Bank of America agreed to finance affordable rental housing, a top priority for city and state leaders, particularly Democrats, like Mayor Bill de Blasio [6] of New York, who called the deal ‘historic.’

The Attorney General is apparently following what Cohen calls “the Holder Doctrine,” after a 1999 memo composed by Holder as deputy attorney general, which calls for large financial settlements in lieu of criminal prosecutions. Yet while the big numbers may make a splash, there are apparently enough skeletons in the big banks’ closets for them to consider this kind of money a wise investment. And requiring Bank of America to, among other things, offer hundreds of millions of dollars in new mortgages to those who can’t afford them as punishment for irresponsible subprime lending has a certain irony to it that can’t be escaped.

In fact, the entire effort bears an unmistakable resemblance to one of the president’s favorite television shows [7], HBO’s “The Wire.” In it, serious narcotics and murder investigations are rolled up in order to conduct city-wide drug raids that send a television-friendly message by putting “dope on the table.” One wonders how big a table it would take to proudly display $7 billion, or $13 billion, or $16.65 billion. Mr. Holder might be in the market.

Follow @joncoppage [8]

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#1 Comment By Johann On August 22, 2014 @ 10:35 am

Why is it never mentioned that Bank of America was strong armed by the government into acquiring Merrill Lynch? The whole 2008 financial crash, its causes by both government and Wall Street, the shenanigans during, and bailouts after, are one of the most disgusting periods in the history of this country.

If government would have just stayed out of it, the banks would have never lent to unqualified borrowers, and even then, once the bubble burst, if government would have just stayed out of it the banks would have failed. Medium and small banks would have gobbled up the Wall St bank’s remaining assets in fire sales, including home mortgages for pennies on the dollar. Those smaller banks would have been more than happy to write off principles and still made a killing. Yes, home prices would have crashed even more, but they were artificially high to begin with. But if loan principles were reduced, homes could have still been sold and bought, and homes would have been affordable to many more people. But no, the Ivy league trained central bank economists cult religion is that falling prices must be prevented at all costs, and so they kept prices high artificially against market forces. And here we are in 2014 still in a non-recovery, except for big banks of course.

#2 Comment By SDS On August 22, 2014 @ 10:49 am

“Shares of Bank of America jumped 4 percent on Thursday, suggesting investors believe that the bank could take the settlement in stride.”

And NO ONE is going to jail…..

What a country!!

What a farce…..

#3 Comment By balconesfault On August 22, 2014 @ 11:21 am

@Johann If government would have just stayed out of it, the banks would have never lent to unqualified borrowers

Ha! Your evidence for this?

Medium and small banks would have gobbled up the Wall St bank’s remaining assets in fire sales, including home mortgages for pennies on the dollar.

With what? You’re assuming that medium and small banks would have had anything left to buy those assets with in the midst of a massive financial meltdown?

And meanwhile, when those large banks started failing, payrolls and transactional costs for millions of businesses across America would have been delayed, causing massive ripple effects in an economy that was already staggering.

Without greater government intervention than was politically feasible in America of 2008, we were stuck with the bailouts and the Fed continuing to pump money to the big banks to keep us from heading into a serious depression. Those complaining about where we are still today (with a 4% real GDP increase second quarter 2014) still can’t wrap their hands around what a precarious situation we were 6 years ago.

#4 Comment By cdugga On August 22, 2014 @ 12:35 pm

The myth that unqualified buyers caused a global mulit-trillion dollar collapse of the financial market and economy lives on!
This piece talks about what happened and claims that what happened was kept a secret by banks agreeing on a relatively low settlement to avoid an investigation that would find out those secrets that are not really secrets. Maybe naming names in emails would get some individuals in hot water since our justice system is so fair and swift!
But what really is missing, is how the mortgage and mortgage securities market was played by hedge funds, who probably actually had a guiding hand in creating the bubble and hedging against it with derivitives when it popped. They got greedy though. They hedged against it many times the actual value of the securities and above the ability of insurers like AIG to pay off. Enter the fed and the taxpayer, who bought up all those worthless securities by simply printing more money and devalueing liabilities.
As has been stated many times before, it is doubtful a republican administration would have gone after any banks or investment houses, since they were thouroughly invested in the unqualified buyer due to government encouragement of home ownership mantra as cause for the trillion dollar global catastrophe. I have that mantra filed right next to the one about how the market works best with some corruption and less regulation, which is right next to the current file on how the congress would work better if we allowed earmarks to major legislation. I need to retrieve those files and separate them from all the bad things Obama is responsible for since they are getting buried under all the mayhem he has caused. Like, I stepped in dog crap yesterday. Darn Obama!

#5 Comment By pathetic On August 22, 2014 @ 12:49 pm

“large financial settlements in lieu of criminal prosecutions”

Bottom line: Holder hasn’t sent anyone to prison. He let rich Wall Street and Washington criminals buy their way out of criminal prosecution with meaningless fines – fines paid for by stockholders and taxpayers.

The Fed has been pumping the big banks full of “quantitative easing” money since 2008. What do they care about “record fines” when they’ve made hundreds of billions more from Fed monetary policy and taxpayer bailouts than all the “record fines” put together – and got to skate on criminal charges into the bargain?

Holder is clearly never going to do the right thing. Millions of Americans are still suffering long term unemployment, recession and a catastrophic drop in household income and wealth because of criminality on Wall Street, and, even more, because of the corrupt activity of government employees and elected officials, including Barney Frank and Chuck Schumer, Wall Street’s enabler and coercers on their respective banking committees.

#6 Comment By David Naas On August 22, 2014 @ 1:24 pm

In the “old days”, local police and bordellos would have a fine little dance. With a mighty glare of publicity, the police would bust a few houses of ill repute, embarrass a few clients, and the next week, the girls were back working as usual. The raids were entered in as a cost of doing business. No real effort was made to close them down entirely and forever. “All part of the show.”

#7 Comment By sglover On August 22, 2014 @ 1:51 pm

balconesfault:

Without greater government intervention than was politically feasible in America of 2008, we were stuck with the bailouts and the Fed continuing to pump money to the big banks to keep us from heading into a serious depression. Those complaining about where we are still today (with a 4% real GDP increase second quarter 2014) still can’t wrap their hands around what a precarious situation we were 6 years ago.

Yes, government intervention on a heroic scale was necessary. But a determined, parallel campaign of investigations and prosecutions was every bit as necessary. If Obama/Holder had had the courage and integrity to pursue such a campaign, I believe there would be far less of the hindsight second-guessing that you’re (not unreasonably) objecting to.

On a less elevated note, it would have been politically shrewd: With tools like Fuld and Blankfein and Mozillo as his adversaries, Obama could have brought the phrase “malefactors of great wealth” out of the attic, and built a real coalition for 2010 and beyond.

#8 Comment By Johann On August 22, 2014 @ 2:42 pm

@balconesfault Without greater government intervention than was politically feasible in America of 2008, we were stuck with the bailouts and the Fed continuing to pump money to the big banks to keep us from heading into a serious depression. /

That’s the banster extortion racket. Fear keeps everyone in order. Its true the crash would have been worse, but the recovery would have been v shaped, and the big banks would be gone.

And if smaller banks had nothing to buy the home mortgages with, then the homeowners would not owe anyone any money, and they would own their homes outright, or most likely, the homeowners themselves could buy their own mortgages for near nothing. So homeowners would make out at the expense of the big banks. As it was, big banks made out at the expense of the taxpayer.

The “masters of the universe” cannot imagine the economy continuing without them, and the system will never be reformed from within. It will have to burn down completely before something better rises from the ashes.

#9 Comment By JonF On August 22, 2014 @ 4:59 pm

Re: If government would have just stayed out of it, the banks would have never lent to unqualified borrowers

This is just high octane BS. The problem was not so much banks lending to unqualified borrowers as it was non-bank lenders (New Century Inc, Countryside… the roll call goes on and on) making shady loans that should never have been made–AND NONE OF THOSE FIRMS WERE COVERED BY THE CRA!!! They made those loans because they knew they could sell them to Wall Street (and, indirectly in many cases to Fannie and Freddie) and not have to worry if they went bad later. The government was not forcing them to do anything. The government’s guilt was negative: they failed to police the market.

#10 Comment By Lord Karth On August 22, 2014 @ 5:36 pm

balconesfault writes: “Without greater government intervention than was politically feasible in America of 2008, we were stuck with the bailouts and the Fed continuing to pump money to the big banks to keep us from heading into a serious depression. Those complaining about where we are still today (with a 4% real GDP increase second quarter 2014) still can’t wrap their hands around what a precarious situation we were 6 years ago.”

So instead of a short, sharp slowdown, we got a rolling stagnation. I am not convinced that what we have is much better that what would have happened if we let BoA (which is STILL insolvent, btw) and its fellow banking-hulks go down and get taken apart.

Pumping billions in magicked-up dollars into these banks is simply setting up the next round. The only thing that got us was a wave of asset-price inflation which is running out of steam. That 4 % GNP increase is almost certainly a nominal number; if you check your local grocery store, gas station and health-insurance bill, you will see that prices in those areas have gone up by much more than 4 %.

My read: real GNP fell in the first quarter, and will have stagnated (at best) in the second. If real GNP rose by more than 0.5 % I’ll be quite surprised.

Your servant,

Lord Karth

#11 Comment By bad ole days On August 23, 2014 @ 2:46 pm

“@Johann If government would have just stayed out of it, the banks would have never lent to unqualified borrowers

Ha! Your evidence for this?”<

I remember watching a Clinton speech in the '90s where he talked about his "national home ownership" initiative, basically making it easier for poor people to buy homes. The group watching included a high ranking credit officer at a major bank. Clinton's locutions were as usual touchy-feely and vague, and someone asked the banker what it all meant. He put it succinctly:

"He's going to force me to make bad loans."

We laughed, but of course that's exactly what Clinton did (assisted by Frank, Schumer, HUD, et al). I should add that the banker couldn't have cared less about Clinton's "character problem" and was generally happy with the Clintonites for repealing parts of Glass Steagel, allowing the banks to take other risks judged safer than the bad housing loans they were "forced" to make. And they thought they had the risk covered, converting it to opaque derivatives that they could sell to stupid people.

His apologists like to say that while Clinton may have disgraced his office, at least he was good for the economy. In fact, his actions contributed to the financial collapse in the way that alcohol or drugs destroy a personality, incrementally, seductively, over time, the full accounting and permanent damage not apparent until long after the party is over.

#12 Comment By cameyer On August 23, 2014 @ 11:12 pm

Wow. I miss the ’80s when men were men and criminals were criminals. Milken, Boesky, Keating. Individuals, kings of finance, larger than life, brought down. They were punks compared to the titans who enabled the Great Recession of 2008.

#13 Comment By Elijah On August 24, 2014 @ 8:57 am

And why is it never mentioned that the federal government had a HUGE role in encouraging those “questionable mortgage practices” (before they became questionable)?

The first people who ought to go to jail are the Equality Army who insisted that government-backed mortgages be available to basically EVERYONE, credit worthy or not.

Sheesh.

#14 Comment By balconesfault On August 25, 2014 @ 1:18 pm

@sglover But a determined, parallel campaign of investigations and prosecutions was every bit as necessary.

I agree. In the post-Citizens United, 100% GOP Obstructionism era that we’re in, I can understand some of the political decisions made by the Obama Admin in order to be able to move any parts of their agenda … but it doesn’t make me happy.

@Lord Karth I am not convinced that what we have is much better that what would have happened if we let BoA (which is STILL insolvent, btw) and its fellow banking-hulks go down and get taken apart.

Without a government ready to step in and actually take over parts of the financial sector to keep it running (remember that Obama’s opponents were screaming that he was taking over the financial sector at the time he was pampering them) I think that it would have been much much worse than what we got. Because the “short, sharp slowdown” in combination with a people mortgaged to their necks and armed to the teeth could have turned very very nasty in America.

I think conservatives should oppose measures which increase civil unrest – but many of today’s “conservatives’ seem to fetishize it.

if you check your local grocery store, gas station and health-insurance bill, you will see that prices in those areas have gone up by much more than 4 %.

My grocery bills haven’t really budged in years … my gas prices are actually pretty low these days (bought unleaded yesterday at $3.23 a gallon) … and health-insurance has been going up steadily for what, decades? No, my cost of living has certainly not gone up more than 4% in recent years.

@bad ole days “He’s going to force me to make bad loans.”

We laughed, but of course that’s exactly what Clinton did

Umm … how? I look at the 00’s, and I recall an orgy of lending taking place, with bankers advertising and pushing a huge menu of high risk ARMs and other products to not only get people into new homes, but to encourage them to refinance and take money out of their appreciated (on paper) homes. All this abetted by a corrupted appraisal system that was allowing homes to be valued well above comps, and a corrputed rating system that was wildly underrating risk in order to stay in good graces with the big banks.

How exactly did the Clinton policies force lenders, appraisers, and insurers to do this?

#15 Comment By Fran Macadam On August 25, 2014 @ 1:45 pm

The canard that “the government was to blame” that “strong-armed” the banks into making money they didn’t want to, is belied by the Wall Street heavies who chortled, “we just made the President of The United States a Wall Street Insider!” after getting Clinton onside for the Glass-Steagal repeal against mixing speculation, insurance and regular banking. Sure, the very government bought and paid for by Wall Street was completely to blame, not Wall Street, like some sort of fall guy for the Mob.

#16 Comment By Cumberland On August 25, 2014 @ 9:22 pm

“How exactly did the Clinton policies force lenders, appraisers, and insurers to do this?”

The CRA, revamped “credit scores” as a way of diminishing banker discretion, warnings about “redlining”, selective enforcement, etc etc. When the government’s your biggest customer and it wants more otherwise uncreditworthy people buying homes, you get it done.

Political pressure of this kind is nothing new. It continues to this day :

[9]

From the link: “Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.”

The banks are fine with it so long as they believe that taxpayers will bail them out again if Obama’s reprise of Clinton’s policies produces the same result.