Top law enforcement officers from most of the 50 states gathered last week in Washington, D.C., for the annual spring meeting of state attorneys general, where the hot topic was the $25 billion foreclosure settlement finally filed in federal court on Monday.
More than a dozen state and federal officials who crafted the deal, which resolves charges that banks wrongfully foreclosed on homeowners, say it is the most ambitious of its kind ever reached, far outstripping the complexity and political machinations of the decade-old case against the giant tobacco companies.
But instead of high-fives and fist-bumps, officials, who had sniped at each other -- and at the deal -- for the better part of a year, tried to come to grips with the aftermath. The deal had to overcome disagreements between the banks and government officials, and between liberal Democrats and Tea Party-backed Republicans.
"It was like the Battle of Verdun, every square inch was fought over," said George Jepsen, the Connecticut attorney general, of the 16 months of negotiations between federal officials, state attorneys general and five major financial institutions -- Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) -- over the foreclosures and a host of other nasty "servicing" abuses.
But the most rancorous split was between a group of mostly Democratic attorneys general led by Iowa's Tom Miller and a breakaway group primarily of other Democrats, led by New York's Eric Schneiderman.
Schneiderman, who fought hard to change the terms of the settlement, contended that the unfolding agreement would go too easy on the banks. But Miller's contingent claims Schneiderman's revisions were all but meaningless and that they served as a smokescreen for his real agenda: to roll the investigation into a broader probe into the roots of the financial crisis.
To some degree, this is a fight for bragging rights, though some critics say there is little to brag about here. The banks have agreed to provide about $5 billion to the states and $20 billion in homeowner assistance, but most homeowners don't qualify because their loan is owned by Fannie Mae, Freddie Mac or other group that is not participating in the settlement. The deal also requires banks to make make small payouts of about $2,000 to customers who lost a home to foreclosure.
Still, as Schneiderman steps into a new role leading a high-profile mortgage fraud task force set up by President Barack Obama, it seems likely that some of the states he might wish to count on for support now want nothing to do with him.
New York and other holdouts like Delaware argue that it was only because of their insistence that critical changes were made to the deal. Those changes preserve states' rights to sue the banks for a range of issues directly related to the packaging, or "securitization," of rotten home loans that later sparked the financial crisis.
"We preserved all the different claims that led to the housing bubble and crash," Schneiderman said in an interview with The Huffington Post.
Officials in the Iowa-led contingent, which did the bulk of negotiating with the banks, said they planned from the very start to grant the banks only a narrow legal release from future lawsuits -- and they maintain that they would never have given the banks a free pass on securitization abuses.
"The releases were narrow from Day One," said Rob McKenna, the Washington attorney general and part of the team that negotiated under Miller's leadership. "If you look at the original language, it covers everything that's in the release as it stands now, it's just got a hell of a lot more words to it."
Officials from the group of eight states that negotiated directly with the banks say Schneiderman -- who was not a member of that group -- enlisted left-wing activist groups and travelled to California as part of a campaign to blow up the deal in order to pursue his own political goal: to combine the mortgage servicing investigation with a broader probe into the sale of bonds stuffed with rotten loans. They say combining the investigations would have been unmanageable and ultimately would have delayed relief to struggling homeowners.
In interviews with The Huffington Post, representatives of those states said that New York did not have to go along with the settlement, but that they had never witnessed an attorney general try to ruin a deal for everyone else.
Schneiderman's view, according to officials familiar with his thinking: better to bruise some feelings than to live with a deal that would let the banks off the hook for their role in causing the greatest financial catastrophe since the Great Depression.
BANKS FALSIFYING DOCUMENTS
Banks have proved remarkably inept at handling the millions of troubled loans that spilled into their laps after the housing bubble popped in 2007.
The long list of well-documented complaints from homeowners and their advocates includes wrongful fees slapped onto loans for "services" like property inspections that were never conducted, charges to homeowners for "force-placed" home loan insurance, and improperly applying payments of late fees before principal, in direct violation of servicing guidelines.
Still, no one in the government seemed to be paying much attention until widespread reports began to emerge in 2010 that banks were "robo-signing" mortgage documents -- using low-paid employees to forge thousands of signatures in a single day -- in order to speed foreclosures.
The states soon banded together to investigate these and other loan servicing practices at the biggest banks, joined by more than a dozen federal agencies. Miller, the long-serving Iowa attorney general and an experienced negotiator of multi-state deals, was tapped to head the group.
To some surprise, the outgoing attorney general of New York, Andrew Cuomo, elected to join in. (New York has much broader powers than most states to pursue financial crimes, and as such often flies solo on financial investigations.)
Schneiderman succeeded Cuomo at the beginning of 2011 and began to signal that he was interested in a broader probe into the roots of the financial crisis. In the late spring and early summer, New York subpoenaed most of the major Wall Street banks, including Goldman Sachs, for information about bundling home loans into securities. Schneiderman began investigating the banks' use of MERS, an electric database that tracks ownership of mortgage loans. Delaware Attorney General Beau Biden also launched an investigation.
Relations between New York and the negotiating states began to break down around the same time.
In early June, New York effectively dropped out of the direct talks over servicing misconduct when it declined to join the smaller group of states leading negotiations with the banks. New York officials said they still kept close tabs on the progress of those talks through direct talks with the federal government and the banks.
New York officials wanted assurances that they would be able to sue the banks for any misconduct they discovered as a result of their investigations. But they felt they were being rushed to sign on to a deal that was heading to completion and one that simply wasn't good enough. They said they feared that the deal would resolve charges that had not been properly investigated.
But the Iowa, Washington and Connecticut attorneys general all said they never contemplated giving the banks a release from future securitization lawsuits -- though the banks certainly asked for a waiver.
"It's absolutely true that the banks asked us to release all these claims,” said Patrick Madigan, an assistant Iowa attorney general who worked closely on the deal. "They wanted us to release everything under the sun and maybe a little more. Is it true that we told them no? Yes, it is true. I personally told them no on many, many, many occasions. I told them, 'You are not going to get that. You will never get that. You need to stop asking us for that.'"
"Clearly, banks would have liked to get complete immunity," said Shaun Donovan, the Secretary of Housing and Urban Development, who helped lead negotiations on behalf of the federal government. "Drafts that they circulated included everything, and were misperceived as having the approval of some of the A.G.s. But [liability releases] were never as broad as some people feared."
Documents obtained by The Huffington Post that circulated among these state attorneys general in early summer back up the claim that a broad release for liability was not contemplated.
"It is imperative to insulate these [securitization] claims and investigations because they are unrelated to servicing," read a line from one email written by a state official working with the Iowa contingent on June 7, 2011.
A few weeks later, draft language about releases was circulated for the first time among the negotiating states. There will be no release or waiver of claims "concerning the securitization of mortgage loans and/or the purchase, transfer, assignment or sale of mortgage loans in any form on the secondary market," the document reads.
By this time, Schneiderman's team was no longer a part of the direct talks. The New York attorney general's skepticism had hardened into opposition. Soon, he was meeting with housing activists and other progressive groups, urging them not to support a settlement.
In August, in a largely symbolic gesture, Miller kicked Schneiderman off a broader executive committee of states working toward an agreement, saying that he had "actively worked to undermine the negotiations."
The Schneiderman camp is proud that it won the support of organized labor and progressive groups like MoveOn, which helped lead a successful campaign to sway opinion in liberal circles against the deal that was taking shape.
They were also still trying to make it bigger. In an interview with The New York Times in August, Donovan characterized the disagreement as one over whether or not to wrap the robo-signing and servicing probe into Schneiderman's burgeoning securitization investigation.
By last fall, Schneiderman had won support for his cause from attorneys general in Delaware, Nevada, Massachusetts and Minnesota, some of whom launched their own investigations into securitization misconduct. But he knew he needed another big state to join his rebellion, said a source familiar with his thinking.
On September 30 he got his wish. Kamala Harris, the California attorney general, announced she was dropping out of the talks in part because she felt the release of claims contemplated under the deal was too broad.
With California, one of the states hardest hit by the foreclosure crisis, and New York, the nation’s financial epicenter, both out of the talks, the banks were less motivated to continue negotiating a national deal, according to several negotiators.
Donovan stepped in to break the stalemate.
BROKERING THE DEAL
In September, Donovan began talking directly to Schneiderman. The goal was to reach an accommodation in which New York and other holdouts would give up trying to wrap together robo-signing and securitization claims in exchange for a narrower liability release that would preserve their ability to sue the banks for other mortgage-related misdeeds.
Meanwhile, the banks and the other states, along with Donovan and officials at the Department of Justice, were figuring out a way to proceed should New York and California remain out of the deal.
Just before Christmas, negotiators developed a sliding scale of payments by the mortgage companies to the government, contingent on which states signed onto the deal. Without California, for example, the total dollar value (including money pledged to principal write-downs and other loan modifications) would have been $19 billion, rather than the ultimately agreed-upon $25 billion.
The Iowa-led contingent says that fear of getting left out of a deal that was rushing to completion -- not any big concession on the part of the banks -- was what ultimately convinced the reluctant states to join in.
On the afternoon of January 23, Donovan's talks with Schneiderman paid off. The Obama administration asked him to co-chair a new task force to investigate a range of Wall Street abuses. Schneiderman accepted and scored a plum spot for the State of the Union speech in Michelle Obama’s private viewing box that evening, during which the president called attention to the new initiative.
"The president elevating this issue to the State of the Union was the culmination of a long process," Schneiderman said. "It was a message to me and everyone else that the president has made a commitment to this."
Schneiderman said that the announcement signaled to the negotiating parties that New York would get what it wanted: the chance to push back on the behavior by banks that sparked the financial crisis, specifically, the packaging and selling of millions of rotten home loans to investors.
After that, the deal sped to completion. On Feb. 6, Miller and other Iowa officials gathered in an office in Des Moines to began the final round-up of support from their colleagues in other Democratic states.
A similar scene was unfolding in Denver, where Colorado's John Suthers was calling his fellow Republicans.
"I felt like a college football coach on signing day," Suthers said. "I had to convert verbal commitments into letters of intent."
Three days later, federal officials announced they'd reached a deal with the banks. New York was one of the last holdouts.
So what did New York get in the end that wouldn't have otherwise been in the document?
Among the specific releases the New York contingent won is the ability to use the facts obtained in a foreclosure case in future lawsuits; the deal otherwise protects the banks from most foreclosure-related federal or state litigation. New York also won the right to sue the trustees that manage the giant pools of securitized loans. And New York can specifically sue banks for their use of the MERS mortgage-tracking database.
Donovan said this is important. "It is wrong to say Schneiderman and other A.G.s didn't impact and move the releases in a significant way," he said.
Some officials from the negotiating states said that these could prove valuable concessions, but said there was no need for Schneiderman to start a civil war in order to win them.