naked capitalism

For months, it has looked as if Iowa state attorney general Tom Miller and the Department of Justice have been effectively negotiating on behalf of the banks to try to secure a broad settlement to give the banks a talking point and create the perception that the mortgage mess is on the mend. In fact, it would not stop the train wreck in local courts, since a deal would not restrict the rights of borrowers. However, getting the AGs out of the equation would still be of benefit to the banks, since their investigations typically unearth information that assist private litigants.

But we have long thought that the settlement talks have been a weird PR exercise, in that if the talks were perceived to be getting momentum, they’d actually get momentum. But with no damaging findings from investigations to pressure the banks to the table, the only thing the AG group has to offer is a very broad release, and we’ve heard repeatedly that a lot of AGs regard that as problematic. And with good reason. The banks know what a release is worth, and given that bank stocks have responded well to news that these talks are moving forward, it’s pretty clear that the banks regard a broad release as cheap relative to what they are being asked to pay.

Three (New York, Delaware, and Massachusetts) have already defected, and we believe Nevada is an undeclared non-participant, and Arizona and California are likely to follow suit.

Moreover, the efforts to try to create the impression that the deal is going somewhere have been laughable. Instead, the reverse has happened. I’ve lost count as to how many times the press has reported that the intent was to ink a pact within weeks; the AGs (fortunately) haven’t yielded to this faux urgency. Not that the negotiators conducted themselves competently: the Tom Miller/Federal regulators presented a partial term sheet in early March, an unheard of move in deal-making (you don’t put your ask out piecemeal). And the AGs were kept in dark by Miller and had that draft sprung on them, which is exactly what you’d expect if someone was working against you on behalf of getting a deal done.

The latest update is comical, if you read between the lines. The deal is cash for a release. Everything else is decoration. And both sides of that deal are falling apart. The banks are squabbling among themselves as to who has to pony up what, with everyone except maybe BofA posturing that they really don’t owe that much. Oh, and the other side of the equation, the release? The banks and the AGs are not on the same page.

But if you read the Wall Street Journal article on the state of play on talks, you might well be fooled by the upbeat tone and the emphasis on the agreement on the stuff that does not matter (we and others went through the original AG term sheet, and it was pathetic, since virtually all of it was nice sounding exhortations which merely having the banks agree to comply with existing law!). For instance:

All sides have agreed to a framework that would govern how banks meet their obligations once a deal is reached. Those include principal reductions on certain mortgages, forgiveness of second-lien loans, restitution to borrowers and dealing with foreclosure-related blight. A person close to one of the banks said remaining differences are narrowing.

Earth to base, “remaining differences” are irrelevant if the biggest items aren’t close to resolution. And in fairness, the Journal did highlight the seriousness of the squabble on the banks’ side of teh table:

U.S. banks trying to negotiate a settlement over the home-foreclosure mess have hit a new hurdle: They are squabbling over how to split the tab.

The lack of a deal so far among the nation’s largest home-loan servicers has already depressed bank stocks, and an extended impasse could further spook investors.

“As time goes on, banks will lose the PR battle,” said Paul Miller, banking analyst with FBR Capital Markets. The terms of a settlement, he said, are less important than getting it done. “They need to get everything behind them.”

That isn’t how the banks see it. They want a broad release, otherwise the AGs will still have areas where they can litigate, and that will leave the matter unsettled.

We suggest readers keep the pressure on attorneys general. Call yours (you can find their phone numbers here). Tell them the banks lied, they promised they’d quit robosigning and document abuses and they haven’t. They can’t be trusted, so there should be investigations, including servicing software audits, and prosecutions, not a settlement.