Slate
Simon Johnson
Why did the Obama administration agree to a "robo-signing" settlement that barely punishes the huge banks behind the foreclosure crisis?
Earlier this month, the federal government and most states agreed to a $25 billion settlement with Bank of America, JPMorgan Chase, Citibank, Wells Fargo, and Ally Financial for carrying out fraudulent foreclosures on mortgages. The settlement will direct $20 billion toward mortgage relief for borrowers and $5 billion to the government. As Dennis Kelleher of Better Markets has argued, this deal is a complete sell-out to the financial industry.
Simon Johnson
Why did the Obama administration agree to a "robo-signing" settlement that barely punishes the huge banks behind the foreclosure crisis?
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| The government reached a settlement with five major banks regarding mortgage-servicing abuses during the foreclosure criss |
First, there was no serious criminal prosecution, meaning that no one will be charged with a felony and no one will go to jail. In terms of affecting executives’ incentives, this is the only thing that matters.
Even the terminology used to frame the discussion is wrong. Kelleher, an attorney with extensive experience in private practice and the public sector, tells it like it is: “ ‘Robo-signing’ is massive, systematic, fraudulent, criminal conduct.” Alternatively, as he points out, we could just call it “lying, cheating, and stealing.”
Second, the civil penalties in this settlement—a form of fine—are minuscule relative to the size of the companies involved. As Shahien Nasiripour, one of the best reporters on this issue, dryly put it: “None of the five lenders have said they expect to incur a material charge due to the settlement.” In other words, from a corporate perspective, the penalty is a trifling affair.
Third, such fines are, in any case, paid by the companies’ shareholders, not by their executives or board members (all of whom carry insurance). In the rare cases in which fines have been levied on individuals, either their insurance policies picked up most of the bill, or the penalties were trivial relative to the cash compensation that they received while committing their crimes—or both.
As if all of this weren’t bad enough, the banks reportedly will be able to use government money to write down the value of mortgages, which amounts to subsidizing them to pay their own meaningless fines.
The Obama administration and its allies have worked hard to sell its settlement with the banks as one that will have a meaningful impact on the housing market. But nothing could be further from the truth. As Kelleher points out, the United States has “more than 10 million homes under water” (the outstanding mortgage exceeds the house’s value). “Twenty billion dollars doesn’t make a dent in that: one million homes at $20,000 loan forgiveness is it.”
In fact, the Obama administration’s settlement with the mortgage lenders is consistent with its track record on all of its policies related to the financial sector, which has been abysmal. But it is also puzzling. Why would the administration continue to bend over backward to be lenient toward top bankers under these circumstances?
I honestly do not believe that the administration’s stance reflects any form of corruption—payments made to individuals or even to political campaigns. And, in this case, it does not even appear to reflect the lobbying power of big financial players. That power certainly explains why the Dodd-Frank financial reforms enacted in 2010 were not stronger, and why there is now so much opposition to effective implementation of that legislation (for example, there is currently a huge fight around the “Volcker rule,” which would limit proprietary trading by megabanks). But mortgage lenders’ criminal activities are another matter.
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