Sunday, October 09, 2011

Why the Proposed $20 Billion Attorneys General Mortgage Settlement Stinks

It's hard to get a handle on the scope of the whole the banks dug for the entire economy in their mishandling of mortgages from 1990 or so to 2007. Incompetence and self-dealing across our financial community resulted in a vast wealth-distruction machine that not only cost more than 20% of our national wealth, it left us with broken institutions, no confidence in our economy, and, to top it off, it left millions of Americans with no home equity, no mobility and no ability to chase new economic opportunities. The best way to get a general picture is to look at the decrease in the value of your home and look at the increase of homeowners who are now trapped by negative equity. Wall Street and national demonstrations notwithstanding, President Obama still doesn't seem to get why he has lost so much support and credibility with the left two thirds of the American constituency (Forget the right third, they never liked him in the first place.) when he still seems to support letting the banks walk away with slap on the wrist for dragging the economy under. (Here's my prescription for Obama: fire Tim Geithner, you'll see your poll numbers go up 10% immediately, and you'll probably start getting some good advice once and a while.)

Rolling Stone writer Matt Tiabbi does an excellent job in a brief article that describes in plain English why the proposed $20 billion settlement between the 50 attorneys general and the big banks would end up as a bailout that dwarfs TARP. In essence, it would mean allowing the banks to pay $20 billion and walk away from more than $1 trillion in potential losses. Quoting:

How? The math actually makes a hell of a lot of sense, when you look at it closely.

Any foreclosure settlement will allow the banks to pay one relatively small bill to cover all of their legal liabilities stemming from the monstrous frauds they all practiced in the years leading up to the 2008 crash (and even afterward), when they all schemed to create great masses of dicey/junk subprime loans and then disguise them as AAA-rated paper for sale to big private investors and institutions like state pension funds and union funds.

To recap the crime: the banks lent money to firms like Countrywide, who in turn created billions in dicey loans, who then sold them back to the banks, who chopped them up and sold them to, among other things, your state’s worker retirement funds.

So this is bankers from Deutsche and Goldman and Bank of America essentially stealing the retirement nest eggs of firemen, teachers, cops, and other actors, as well as the investment monies of foreigners and hedge fund managers. To repeat: this was Wall Street hotshotsstealing money from old ladies.

later in the article. . .

[Just one] settlement, covering 22 mostly private plaintiffs, cost one bank, Bank of America, nearly half the size of the entire proposed AG settlement. This is from the Times story about that deal, in June:

In a research note, Paul Miller of FBR Capital Markets projected that Bank of America could face a total of $25 billion of losses from the soured mortgages, the most of any of the major banks.

So a private analyst this summer was estimating that just one bank, Bank of America, could face more in damages than the Obama administration and the AGs are now trying to “wrest” from all the major banks, combined, for all their liabilities.

Just a few days ago, news of more such suits came in. An Irish company called Sealink Funding is suing Chase and Bank of America, seeking $4.5 billion combined in connection to losses in mortgage-backed securities sold to them by those banks. Meanwhile, a German bank, Landesbank Baden-Wurttemberg, is suing Chase for an additional $500 million in losses.

These huge amounts – a few billion here, a half a billion there – are coming from single companies, directed at single banks. And think about the Bank of America settlement for $8.5 billion: what’s the usual payoff in a lawsuit settlement? Ten cents on the dollar? Five?

In fact, the settlement amount in that case was just 2% of the face value of the loans when they were securitized ($424 billion), and represented just 4% of the principal still outstanding ($221 billion).

Why do those figures matter? Because the way these securitizations were structured, legally, Bank of America is obligated to buy back any loans that were sold fraudulently at face value – that is part of the legal language in the “pooling and servicing agreements” under which all of these mortgages were pooled.

So minus a settlement, Bank of America – one bank -- had a potential liability of $424 billionjust from its Countrywide holdings! And it got off for $8.5 billion, a major victory.

All of which puts in perspective the preposterously small size of the proposed AG settlement. $20 billion would be a lousy number if we were just talking about Bank of America. But all the big banks combined?

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