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.”