Yours truly has said for months that the negotiations among major banks, state attorneys general, and Federal regulators to reach a settlement of various types of mortgage liability were not going to result in a meaningful deal. Further confirmation of our views came today, via Time’s Swampland (hat tip Lisa Epstein).
The five biggest banks cancelled a session today with the state attorneys general. This move was apparently to object to the FHFA lawsuits filed against 17 banks which Dave Dayen penciled out at $60 billion in potential liability.
This hissy fit seems wildly misguided, since the FHFA has not been a party to the foreclosure settlement talks. It isn’t even a part of the Executive Branch, so it’s a little hard to charge that the Obama Administration is acting in bad faith (which seems to be the subtext). Per Reuters:
“Each agency has its own statutory authority, and its own particular evidence,” said Peter Swire, a law professor at Ohio State University and former special assistant to the president for economic policy in the Obama administration.
“The FHFA is not part of the executive branch,” Swire added. “It does not report to the president. If the FHFA finds the right evidence, it decides on its own to move forward.”
The idea that a financial services regulator might operate autonomously is clearly not unknown to the major banks. Their captured minder, the OCC, went rogue early in the year to undermine the Consumer Financial Protection Bureau participation in the settlement talks.
But this temper tantrum provides yet more support for our thesis that there will be no deal. It has been evident that there is no ” bargaining” space” between the two sides, that is, a combination of damages and release of liability that both sides will find acceptable. In simpler terms, the two sides are too far apart. The key section of the Swampland piece:
The big mortgage servicers, including Bank of America, Citigroup, JP Morgan and others, were scheduled to meet late this week with the State AG negotiators as part of a separate investigation. Those talks are aimed at a settlement that will address standards for handling past and future mortgages, massive penalties (reportedly as high as $20 billion), and a release from legal liability for the servicers in other mortgage matters.
The State AGs did not foresee releasing the banks from liability for the kinds of violations alleged in the FHFA suit. The AGs are focused on the relationship between the banks and borrowers, while FHFA is focused on the bundled, or securitized, mortgages sold by the 17 firms. The big banks apparently were hoping they would be exempted from suits alleging they fraudulently sold bogus mortgages to investors, knowing they were less safe than advertised.
The State AGs, led by Iowa AG Tom Miller, have been desperately trying to finalize their settlement for months.
Let’s parse this.
Desperate is never a good position to be in during a negotiation, and Miller has only himself to blame for his fix.
The AGs and Federal regulators blew it by rushing forward to negotiate when they had no negotiating leverage. Iowa’s attorney general Tom Miller and the Federal banking regulators gave the store to the banks by failing to do investigations. The only reason someone agrees to a settlement is that he believes going to court will cost him more in the end. But the AGs didn’t even go though the motions of developing a case; insiders tell me no document requests were made. So the body language from the officialdom has been the purpose of these talks is to provide the authorities with some cover (see, we HAVE done something!) and to give the banks a lot of cover.
The evidence is that the AG/Federal regulator side seems to have become wedded to a $10 to $25 billion settlement (that’s a big enough to fool the public into believing the punishment was meaningful, look at the “massive” in the text above as confirmation). But they have the goods only on robosigning, and that isn’t worth remotely that much. So the only thing that the AGs have to offer the banks is a super broad release, which is tantamount to “get out of liability almost free” card. And as we’ve separately pointed out, quite a few members of the AG group are not comfortable with that idea, so even if Miller were to give the banks what they wanted, many of his presumed allies would bolt.
The Swampland piece gives a clear depiction of the gulf. I had long assumed the banks would want a release for securitization liability, such as chain of title issues (meaning failure to convey mortgages properly to securitization trusts). Even though the latest release proposed by Miller appears intended to provide some (perhaps a lot) of cover in that area, quite a few of his fellow AGs seemed unhappy with it. The Swampland piece indicates that they see the negotiations as being over much narrower issues. Oops!
As Miller and the Feds keep beating this settlement dead horse, their position looks more and more untenable; indeed, the cancellation today could be a statement by the banks that they see little point in continuing. Parties that have done their homework keep filing cases with large dollar amounts of possible damages attached to them, so the hope that the AG settlement might deter other litigants has been trumped by events. Expect Miller’s camp to try to craft a “peace with honor” face saving device.