The Obama Administration, the 49 State Mortgage Settlement, and the Spin: A Study in Shamelessness

08/24/2012 02:55 pm ET | Updated Oct 24, 2012

For some time it has been common knowledge that the Obama Administration has not filed charges against a single prominent "bankster." Moreover, let us note that this has not been the unfortunate consequence of an oversight or simple omission. Heading off the filing of serious criminal charges has been much more complicated than merely limiting the number of Department of Justice lawyers assigned to investigate and prosecute serious fraud to a poorly-supported skeletal crew. There is much more to it than that.

To begin, it is hard not to act in the current political and economic environment. Just consider the massive evidence of fraud -- besides the reams of paper and court documents, this includes the many witnesses who have spoken to the media, written testimonials or books, already testified in court on related matters, etc. -- that is strewn across the nation, from sea-to-shining-sea. Consider even this partial list of crimes to be investigated. Accounting fraud screams out for action under Sarbanes-Oxley; loan origination fraud (including, by 2006, almost universal appraisal fraud); the robo-signing, forgeries, and post-dating of documents that for years were routinely submitted to courts during legal proceedings; the myriad of tax avoidance scams and lost paperwork that were a core feature of the mortgage electronic registration systems; the deliberate misrepresentation in the "Warrants and Reps" attached to the packaging and sale of mortgage-backed securities and derivatives thereof; and on and on it goes.

The simple fact is that all of these things have occurred and reoccurred because, as the criminologist and economist William K. Black has repeatedly pointed out, fraud was not an aberration at these firms, it was their core business strategy. With reams of evidence pointing to fraud and malfeasance strewn surrounding us, fending off serious prosecutions has required a non-trivial commitment of time, effort, and extensive 'political capital' on the part of the Obama Administration and its senior staff. Failing to act on this copious evidence took an exceptional act of will. But, they were up to the job.

As an example of this will in action, consider the settlement that the Obama Administration is now beginning to trumpet as one of its greatest achievements. This is the joint forty-nine state and federal settlement wherein the banks paid a mere $5 billion of their own cash to be released from ALL state lawsuits stemming from the massive and systemic fraud that went into the origination and servicing of housing loans throughout the bubble and into the crash (the 'headline number' provided by the White House was $25 billion, but this flatly dishonest claim was quickly dismantled by Yves Smith). For this paltry sum, the banks were released from all liability stemming from a decade-long-run of illicit activities that fleeced millions of customers and inflated a bubble that eventually destroyed the economy of the United States and much of the world. I should add that, coincidentally, soon after this settlement was signed, several states inexplicably dropped or settled what were very promising criminal investigations. Just to remind readers of what is at stake here, the Federal Reserve estimates that the United States lost over $16 trillion in total wealth between 2007 and 2010, with the median American family losing 38.8% of its wealth, leaving them, economically speaking, where they were 18 years earlier, in 1992.

Now, you might ask, to what did the five large banks that were a party to the settlement (Bank of America, Wells-Fargo, Morgan Stanley, Citibank, and Ally Bank) agree to do in exchange for this wonderful bounty of sweeping immunity? They committed themselves, after much dodging and wrangling, to follow the law of the land! Specifically, they promised to stop engaging in fraudulent foreclosure practices. That is harsh. No wonder Senator Richard Shelby (R-AL), Chair of the Senate Banking Committee, was so critical of this settlement.

But, let us be fair, the Administration got more than that. Contingent on their meeting a number of criteria, families found to have lost their home through fraudulent actions taken by one of these five gigantic loan servicers were to be eligible to receive $1,500 to $2,000! Now, I cannot speak for you. But if, as a consequence of fraud or negligence on the part of a major bank, I lost my home and as a consequence also lost my credit rating, neighborhood, dignity, and the ability of any children I might have to remain in the schools and with the teachers with whom they were familiar, I would be very angry. If, years later, I got a check for $2,000, such a paltry payment for all that I had lost would strike me as only one more of a long line of humiliations. Personally, I would happily exchange that $2,000 for the therapeutic vision of seeing executives in handcuffs. While I am not a lawyer, the RICO statute seems nicely tailored to many of these crimes. Even if they cannot get convictions in every case, it would mean a lot to me to know that my elected officials were fighting for justice on my behalf. Perhaps I am just strange that way ...

And indeed, pathetic as this meager $2,000 one-time payment may appear, the reality has turned out to be even worse, because these payments are anything but guaranteed. First, the several states were -- collectively -- promised more money than exists in the entirety of the settlement. Second, the settlement features a significant degree of discretion concerning what the several states can actually do with the cash they receive from the banks. Guess what? At least fifteen states have decided to simply redirect the funds. Who could have anticipated such an outcome? Do bears live in the woods?

Ah, but the Administration would likely retort, they did not give up everything in this settlement. And they are right. It features yet another important provision. Families whose homes were seized in foreclosure through fraudulent means will retain the right to sue the loan originator or servicer who defrauded them. Now there is some real power. Fraud might have left you broke and without a home, but if you can find an attorney willing to take on one or more of the largest firms in the world without a retainer, you are welcome to sue Bank of America or Wells Fargo! Good luck with that. Yes, the Obama Administration has delivered "hope and change" by preserving the right of destitute Americans to sue firms that have access to literally unlimited resources with which to mobilize a defense (unlimited because of the guarantees implicit in Too Big To Fail -- and if you believe the Administration's line that the Dodd-Frank Act ended Too Big To Fail, let me tell you about a bridge in Brooklyn... ).

When this settlement was initially mentioned in the media many of us thought, "C'mon surely the Administration's pandering to the banks has limits, after all, entering into such a settlement would be shameless." But we were wrong. Moreover, the Administration gave far easier terms than any cynic among us could have imagined. As to shame, at least some people in the Administration harbor lingering concerns for the "optics" of the settlement as is evidenced by their vigorous effort -- one that is ongoing -- to misrepresent the out-of-pocket cost that the banks must incur to escape these charges.

Considering that this settlement is in every way and manner utterly indefensible, we can only surmise that Timothy Geithner, Eric Holder, and their colleagues decided to "throw a bone" to the banks to facilitate the raising of cash for the upcoming election. Perhaps they were hoping that the Democratic base and undecided voters would not remember this sordid episode a year or two hence. But if you, like I, had assessed the political strategy behind this settlement along the above lines, you would have been completely incorrect. Several sources are now reporting that California's State Attorney General Kamala Harris has been granted a prime speaking slot during the Democratic National Convention where she has been tasked with highlighting this settlement as a showcase of how the Obama Administration has taken a "tough" stance on bank criminality! Seriously folks, you just can't make this stuff up.

Apparently, Obama's campaign managers believe that reminding listeners of this most awful settlement, one that so clearly defines and encapsulates everything that is so wrong about the Administration's approach to disciplining fraudulent financial institutions, is their best strategy for convincing voters that things would be so much worse under a Romney Administration. Amazing. That this makes sense to the apparatchiks running the upcoming convention speaks volumes about the moral bankruptcy and profoundly limited horizons of the people who staff the highest echelons of the Democratic Party.