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David Dayen: Elizabeth Warren, Tom Coburn Introduce “Naked Capitalism Was Right About the Corruption of Financial Regulators Act” (Not Actually Called That)

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By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

I’ve been going out of my mind the past few days seeing the easily duped traditional media uncritically printing statistical analysis from JPMorgan Chase’s roundelay of get-out-of-jail-almost-free settlements. The gist of it, and this must have been in a Department of Justice release somewhere, is that JPM has “paid” $20 billion over the last calendar year to resolve a variety of disputes, the most recent being their admission that they knew the bogus nature of Bernie Madoff’s business and never generated any suspicious activity reports or raised red flags for regulators (the fact that they took their money out of Madoff feeder funds right before he was arrested being a smoking gun).

Peter Eavis at the New York Times scratches his head and wonders how the bank has “taken in stride” all this hemorrhaging of cash in fraud settlements. Well first of all, considering that shareholders effectively pay the fines and nobody in the executive suites has to go to jail, I’d say taking it in stride is a pretty proper reaction. But just as important is that $20 billion is a FAKE NUMBER. I’m going to go ahead and quote Matt Yglesias on this, mostly because he quotes me:

Consider the $9 billion settlement with the Justice Department (over mortgage-backed securities -ed). Almost half of that consists of “relief” to homeowners rather than actual fines paid to the government. That’s fine—homeowners need the money more than the government does. But as David Dayen has written, JPMorgan can get away with labeling a lot of stuff they would or should have to do anyway as relief that counts for the purposes of the settlement. When the bank writes down the value of an unrecoverable second-lien on an underwater mortgage, for example, that’s a loss for the bank. But when it goes and applies the cost of that write-down against the legal settlement tab, that’s not an additional loss to the bank—it’s just double counting. At best these aspects of the legal settlement are a way of prodding Morgan to acknowledge losses rather than dragging its feet. There is real merit to that kind of prodding, but it ought to be the ordinary work of bank regulators. It’s not a legal penalty.

That’s just one piece of the puzzle. Most of the aforementioned MBS settlement was tax-deductible. The big National Mortgage Settlement and others allowed JPM to write off their penalty with investors’ money. They’re suing the FDIC to stick them with the bill for WaMu losses even though they assumed them in the acquisition. The games are notable and legendary. JPMorgan Chase isn’t worried about paying $20 billion because there is no such number. That the media reports this speaks to their incurious nature, and allows the Justice Department and people like Eric Schneiderman to get away with claiming a “get tough” approach when the settlements look more like back-door bailouts.

Along comes Elizabeth Warren with a bill to attack this corruption directly. Warren and Tom Coburn introduced the Truth in Settlements Act, which uses disclosure to force these little games into the open.

Under the law, any settlement with federal agencies over $1 million would have to be completely disclosed to the public, with all relevant details out there, including how the topline number gets applied in reality. This is from the fact sheet:

The tax code allows corporations to deduct any settlement payments classified as restitution or compensation, but prohibits them from deducting payments classified as penalties or fines. The Act would require agencies to explain how the settlement classified any payments so that the public can easily assess the potential tax implications. Similarly, for settlements that include the cost of credits – such as the $25 billion National Mortgage Settlement that included $17 billion in credits, much of it for routine conduct – the Act would require agencies to explain what conduct would qualify as a credit toward the settlement amount [...]

The Act would require agencies to disclose key details of all settlement agreements – including dates, settling parties, settled claims, and the amount and classification of any payments – and to post copies of such agreements on their websites… Requires companies that settle with enforcement agencies to state in their SEC filings whether they have deducted any settlement payments from their taxes… Requires federal agencies to explain why they deemed a settlement confidential. Currently, many agencies are not required to provide any explanation of why they deemed a settlement confidential. The Act would ensure that a federal agency must provide such an explanation, permitting greater congressional and public scrutiny.

Loving the shout-out to the National Mortgage Settlement (they could have added that the IRS confirmed that at least $12 billion of that relief, for short sales in non-recourse states, was completely worthless). On a conference call about the bill, Warren brought up another issue with the OCC “foreclosure review” settlement that I forgot about:

Last year the Fed and the OCC claimed they had settled with 13 servicers accused of illegal foreclosure practices, and claimed an $8.5 billion settlement. Of that $8.5 billion, $5.2 billion was in the form of credits for what the agency described as “loan modifications and forgiveness of deficiency judgments.” But they left out a key detail. Servicers could rack up credits by forgiving a fraction of large unpaid loans. If they wrote down, say, $15,000 of a $500,000 balance, they would get credit for the full $500,000 loan. That undisclosed method could end up cutting overall value by almost 60%.

In the end this is an incremental step. Eventually this information gets out most of the time, it’s just buried in legalese and details. If anything, the Warren/Coburn bill is a signal to the media to stop being so slavish in uncritically reporting the bogus headline numbers on settlements handed to them by DoJ.

I see this as complementary to Warren’s effort to get agencies to STOP settling and actually enforce the law; she’s just trying to give them nowhere to hide. As she said on the call, “Agencies argue that these settlements are in the best interest of the American people. If the enforcement agencies are truly confident that a settlement agreement is a good deal, hang it out there so we can all see it. And if the agreements can’t stand up to scrutiny, they should toughen up enforcement.”

Regulators are basically getting a free ride from the press for their inadequacy in enforcing the law, and this bipartisan bill puts a big red target on their back. Maybe they’ll think twice about the largesse given to banks in the form of a fake penalty; I’m skeptical, but at least they’ll feel the eyes on them. I am happy to see a Senator basically calling the regulatory agencies liars (on the call, she said “They shouldn’t be able to advertise a high sticker price that they know is untrue”), and moving to produce legislation to stop them from lying. Who knows where it will go – Congress doesn’t pass many laws anymore – but this is a case where the mere potential for embarrassment could spur better behavior.

P.S. I asked Warren on the call about something I was tipped to in the Justice Department’s year-end IG report. It appears that after announcing these fines, the MO of the Justice Department is to “take in stride” the fact that they go unpaid:

But securing a financial judgment is not enough. The Department must also use all available tools to recover money owed to it, and it must ensure that the recovered money is wisely spent. In FY 2012, the U.S. Attorneys’ Offices (USAO) collected $13.2 billion in criminal and civil actions, more than double the amount collected in FY 2011. However, at the end of FY 2012, an additional $23 billion was owed to the United States, including $18 billion in criminal fines and $5 billion in civil debts.

So I said to Sen. Warren, does your bill include something on the timeliness of payment? Her answer: “This one is about the disclosure. You have identified another problem, and one that’s worth talking about… we’ll see what kind of effect we get from sunlight.”

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15 comments

  1. vlade

    The law that needs to be introduced is that if fines over certian level are issued, executives at a certain level must go (and/or face a civil court, up to them). So say 1m fine means upper-middle manager in whose are it is must go, fines on 100m anyone in C suite on whose watch it happened must go. Oh, and require clawbacks of all renumeration for the period this was happening.

    Now there’s “no responsibility” legislature, which is judically (and morally) wrong.

  2. FIAT CRASH

    After reading the FIAT Money articles I have come to the absurd conclusion that America will default and the $$$ will become worthless only when interest payments by the FED equal or exceed the GDP. How many years will that take ?.

  3. Tyler

    Yves,

    I’m starting to feel good about Elizabeth Warren. I still note her vote to repeal or reduce the Estate Tax, but maybe she’s moved left since then.

  4. afisher

    This sits on her website – which is a nice start, but it has not been assigned a legislative number- so until that happens, this is kinda pie in the sky hope. When/if that happens then and only then can folks mobilize / yell at legislator’s to take some action

  5. steelhead23

    Yves, I agree with your title for this legislation and applaud both you and the authors. I also find it as refreshing as a breath of fresh air that Senators Coburn and Warren find commonality here. Forcing government into the sunlight is NOT a partisan issue. The big question for me is: “What are the prospects for this bill?” “Who has lined up to fight it?”

    It is my opinion that the U.S. people are quietly angry at both the pols and the banksters, an enmity that was underutilized in the 2012 elections. Any U.S. senator who stands in opposition to this bill had better not be running for election in 2014.

  6. just me

    David, re this:

    On a conference call about the bill, Warren brought up another issue with the OCC “foreclosure review” settlement that I forgot about:

    Last year the Fed and the OCC claimed they had settled with 13 servicers accused of illegal foreclosure practices, and claimed an $8.5 billion settlement. Of that $8.5 billion, $5.2 billion was in the form of credits for what the agency described as “loan modifications and forgiveness of deficiency judgments.” But they left out a key detail. Servicers could rack up credits by forgiving a fraction of large unpaid loans. If they wrote down, say, $15,000 of a $500,000 balance, they would get credit for the full $500,000 loan. That undisclosed method could end up cutting overall value by almost 60%.

    Yves covered it — it was a point Sen. Merkley made at April 17, 2013 Senate Banking subcommittee hearing on the Independent Foreclosure Review.

    http://www.nakedcapitalism.com/2013/04/independent-foreclosure-review-fiasco-occ-and-fed-decided-not-to-find-harm.html

    Sen. Merkley: Thank you very much, Mr. Chairman. I wanted to continue on this same issue. In your testimony, Miss Goldberg, on page 10, you note that on a loan with an unpaid balance of $500,000, a loan modification that provides any amount of principal reduction, be that $1,000 or $10,000 or $100,000, yields $500,000 worth of credit for the servicers. It’s hard for anyone apart from this process to truly believe that if you do a $1,000 reduction you get $500,000 of credit, yet are you saying absolutely that’s the way it works?

    Ms. Goldberg, NFHA: That’s what it says in the settlement. I have to say, Senator, that when I first read the settlement I didn’t pick that up because it was so hard for me to believe it could be structured that way as well, but in fact that is the wording of the settlement…

    Sen. Merkley: Okay. Well, I’d just to point out that the roughly 6 billion of small, in soft money that’s in the settlement, at that 500 to 1 rate, that is reduced down to 12 million dollars. Six billion goes to 12 million dollars. That’s a vast difference. Now you’ve pointed out, Miss Goldberg, that this creates a pure incentive to do reductions on large loans. Now, I live in a working-class neighborhood, three-bedroom ranch houses. There are no $500,000 mortgages where I live because there’s no $500,000 houses. So your point in your testimony is that working-class communities, and certainly communities of color, are essentially – there’s an incentive to kind of bypass them. Why would the Fed and the OCC agree to a structure that allows a 500 to 1 or more – for that matter, it could have been $1 under the argument you’re making rather than $1000. Why would they agree to such a fictitious form of accounting and a structure that incentivizes the bypassing of working Americans in this whole process?

    Ms. Goldberg, NFHA: I think that’s an excellent question, Senator Merkley. I’m afraid I can’t answer it. It would be a good question to ask them to explain.

    Sen. Merkley: Has anyone at the OCC or Fed explained, given a rational explanation, of what they were possibly thinking?

    Ms. Goldberg, NFHA: At one point I heard one person say that they believed that this structure accurately reflected the value of the assistance that the borrower received. That’s the only explanation that I’ve heard, and it’s not one that I find credible.

    and Yves wrote:

    Recall that the settlement does not require that the soft dollar relief go to the 4.3 million people that were in the target universe for the settlement. It can go to anyone. Do you think the servicers among them would find it hard to dredge up 12,000 borrowers with mortgages of $500,000 or more to give them a $1,000 break? This is why it is critical to get a breakout of the amount of relief, not just in terms of credit but actual action taken and how that was translated into credit, and where the recipients of particular types of credit are located. I’ve always regarded the non-hard dollar portion of settlements as a joke, since they reward things that the bank either would have done anyhow or can do for virtually no cost. This 500 to 1 example makes clear what a fiction these provisions are.

  7. KSTEVEN

    I dont understand how we the people can continue to let or allow OCC and the Federal gov continue to be smiled upon by the lenders who has literally ruined millions of home and lifes, we continue to become bankrupt by these lenders, I was falsly foreclosed on and now have a bk7 on my credit, cant get a another home, Im disabled, husband is recently retired after 32 yrs of hard labor, but yet the continuous lies from the banks and lenders are still ringing loudely today. We are basically allowing them to control our lifes, I cant do it alone, but if all people were to literally STOP paying them, and not LEAVE their homes, maybe the goverment would do something. We would have to stand together, we cant do it alone. its a horriable realization that we see everyday, the bull shit that the feds are going to protect us, give us back what we lost and plus bailed out twice. Well it hasnt help us, we hve been abused over and over by Wells Fargo, they have lied, I have docs from the begining dealig with them, and the foreclosure papers are nothing but lies..even on the poc. I have all the proof , but that dont matter, I want resitution, I want my fair share of what they did as to abuse us, our home our lifes. We will be just another couple homeless, who cares right? Its not even american since the early 1800 to sell or finance something that the value is so low and the price is so high., but yet, they took our hamp over two years for them, THIER MISTAKES to complete, and charges us for that, signed the hamp…our principle was 160,000 before hamp, hamp was to be 147,000 showed on our acct as that, but the next day, it showed 211,000, our value is 153,000. and Wells gets away with it. we lose our home, they have continued to charge hz ins even thou our ins companie they pay out of our escrow., OCC does nothing but sent your complaints to your lender to ans. Really…its rediculous. God help us , as we are all going to continue to be screwed while being smiled at by our own goveerment who we elect to protect us and our rights.

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