I don’t know who is pulling the strings, but any objective look at the so called mortgage settlement negotiations shows that a lot of people are being played for fools. Precisely because Elizabeth Warren is being attacked so forcefully by the Wall Street Journal and other banking industry loyalists, too many of her erstwhile defenders are giving a free pass to the fact that the Administration itself is undermining her, and with her, any attorneys general who sign up for the settlement, assuming it ever sees the light of day.
Recall the Team Obama modus operandi: getting something done, no matter how lame, compromised, or even counterproductive it is, is considered to progress because it presumably can be swaddled in enough propaganda to be made attractive to a presumed to be chump public. Never mind that Obama’s flagging poll ratings and the abysmal mid-term Congressional results, where the Blue Dogs, the Democrats philosophically most aligned with Obama, were mowed down, show that that strategy is becoming less and less effective. Recall in the runup to the mid-terms how many Democratic Congressional candidates were straining to distance themselves from Obama.
The Democratic state attorneys general have even less to gain by playing nice with this Administration. Some are from states that are solidly liberal and/or so hard hit by the mortgage meltdown that being seen to be soft on banks would be political suicide.
Obama himself is clearly enamored with the theatrics of governance. And why not? His assumption is that as long as he looks meaningfully less conservative than the Republicans (which now can be plenty conservative), big swathes of the country will vote for him by default. And now that the Supreme Court Citizens United decision has raised the likely cost of winning the presidency to $1 billion, currying favor with big corporate donors, which of course includes banks, is of paramount importance. So any roughing up is a staged affair.
We have long been of the view that for Elizabeth Warren to think she could make any lasting headway inside with an Administration fundamentally opposed to what she stands for was wishful thinking. Now I have no doubt that this wishful thinking has not developed in a vacuum, that she has been, ahem, encouraged to be unduly hopeful about the odds of her getting the nod as the first head of the Consumer Financial Protection Bureau.
But as with General Petraeus, the move to bring her into the tent was all about keeping the Administration’s enemies closer. It has been particularly keen about neutering critics on the left. Early on, it cut off institutional funding of liberal interest groups that failed to maintain message discipline. Our DC contacts tells us the Obama has now moved up the food chain and is working to defund think tanks deemed to be too pinko (for instance, we were told of one, with all the particulars, that was dumped by a longstanding $1 million a year donor).
Even though Geithner might make a show of considering Warren’s views, he and she are philosophically 180 degrees apart. Not only Geithner’s position has never been so strong, he has managed to stake out a much large scope of authority than past Treasury Secretaries.
It’s quite clear that Warren (and derivatively, the 49 state attorney generals) have been set up even from what little we can see at a remove.
1. It appears she has been given, or fallen for the trap of accepting, a role where she has responsibility but no authority. Anyone who has every worked in a big organization knows they are the kiss of death. At ABN Amro, it was such a well-known way to ruin careers that it was called “the hall of hollow mandates”.
2. Her ability to take ground is further weakened by the strong relationship between Obama and Geithner. She an employee of the Treasury, an advisor to both the Department and the President. She wants to make fundamental changes in the way one of Obama’s most important funding targets does business, which is a hard sell. And even in the absence of those mercenary considerations, Obama is risk averse. Moreover, by all accounts, he and Geithner are so in tune with each other that their relationship has been described as a “man crush.” Unless they have a lover’s spat, what would ordinarily be an uphill battle is more likely to be a Sisyphean exercise.
3. On the mortgage settlement, she is being made the fall guy for an initiative that she joined after it was well underway. She is being presented in the media as the moving force behind the mortgage settlement. In fact, that was initially an affair solely in the hands of the state attorneys general, led by Tom Miller of Iowa. In one of the numerous Congressional hearings on the mortgage mess in November, I recall Tom Miller going out of his way to praise the cooperative relationship with Treasury, in particular, with Michael Barr, then then Assistant Secretary to Financial Institutions. My antennae went up when I heard that; what was Miller doing “coordinating” with Treasury? The Treasury has indicated publicly, repeatedly, that it has little authority over servicers. And the state law issues are very different than Federal. Yes, some polite briefs of Federal regulators might be a smart move, but the state AGs have their own interests and turf to protect.
What happened, it seems, is that the Federal regulators decided to get in front of an incipient mob and try to call it a parade. They announced a complete whitewash of an eight week mortgage exam, apparently as a way to pretend to know something and insert themselves further into the state AG process. As we noted:
And as we saw in the House Financial Services committee hearings on mortgage documentation issues last week, it took persistent grilling by Maxine Waters to establish that regulators aren’t even imposing fines or sanctions for known problems in this arena, which strongly suggests they aren’t even willing to use the powers they do have….
This “review” is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.
4. Miller, as we have indicated repeatedly, is not representing the attorneys general. He is working on behalf of the Administration. The first version of the term sheet that was leaked, a 27 page version, was depicted as a product of the AGs. However, by all accounts, the process is being driven by Federal regulators ex the OCC, which seems out to end run the main effort, or perhaps be positioned to pounce if it implodes. For instance, consider this account by Shahien Nasiripour of Huffington Post:
Sources said many of these details were constantly changing, sometimes from day to day, as proposals zipped from agency to agency. They have not yet been shown to the targeted banks, nor have they been publicly disclosed.
The documents also show that regulators questioned many of their own ideas.
And this, from Dave Dayen of Firedoglake:
Democratic AGs and senior staff, who spoke off the record because of Tom Miller’s lead role in the case, said that they only received the term sheet, seen as a first offer to the banks, a couple days before the meeting, and didn’t know until they got to the meeting that it would be a big topic of discussion. And then, not only were the AGs told about the term sheet and the push for principal write-downs to save as many as 3 million homes from foreclosure, they were told they would have to make someone from their offices available full-time to enforce the terms of the settlement.
Why should any state AG put up with this shabby treatment? They can go their own way and not be part of a window dressing exercise on behalf of Team Obama. Right now, the state AGs and the Administration have no smoking gun. They could easily force the banks to heel by conducting real investigations, but instead seem to prefer bluffing when the banks know they have an empty hand.
And we further have Tom MIller’s office changing his story. We’ve have no evidence of any investigation; his office confessed to as much a couple of weeks ago, as Gretchen Morgenson of the New York Times told us:
Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”
Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.
And per Shahien Nasiripour last week:
The state group has not yet filed a complaint detailing their findings and the violations of various states’ laws. While some states individually have sent banks formal investigative requests for information — and received reams of documents in return — they haven’t yet acted as a group.
Now we suddenly have Miller claiming there was an investigation, per a later story by Shahien:
“That’s a big price to pay for the additional investigations,” Miller said of the potential delay. He added that state regulators had conducted an in-depth audit of Ally Financial, a state-regulated firm and the fifth-largest mortgage handler in the country, according to Inside Mortgage Finance. It was the “most in-depth analysis and investigation of any of the [mortgage] servicers that has been done or will be done,” Miller said.
State regulators will use their findings from Ally as part of the settlement negotiations with the other large mortgage firms, Miller said, as practices were likely the same across the biggest firms.
So we have one quote by Miller, to a publication that is basically a mortgage industry reporting service (as in a large number of its stories are what Eddie Bernays would call propaganda, namely initiated by industry sources trying to make some favorable noise). If you believe this was a meaningful investigation, I have a bridge I’d like to sell you. Given that Ally was the first servicer to be caught robosinging, the odds are high that any investigation was limited to that topic, which the banks have already been trying to clean up.
And “most in-depth exam that ever will be done”? Is this an Administration threat through Miller? This is nonsense. State AG investigations of foreclosure mills and ongoing litigation against Lender Processing Services, which provided the processing backbone to the servicing industry, have the potential to blow open more issues. We are also aware of litigation being readied that is likely to open up additional fronts against the servicers.
For Republicans, it’s a no-brainer not to put up with this rubbish. It takes a bit more intestinal fortitude on behalf of Democrats. Eric Schneiderman of New York has come out vocally against the process, and Lisa Madigan of Illinois has also expressed strong reservations. Catherine Masto of Nevada is by all accounts not going to participate, although she has yet to make a statement to that effect (Nevada and Arizona both have litigation underway against Bank of America; that alone argues against joining the settlement). They should be applauded for refusing to be railroaded by an Administration and an opportunistic state AG that is perfectly content to sell them out. I can only hope that more like minded Democratic AGs will also voice their objections to the process and content of the settlement and better yet, bolt and conduct their own exams and file lawsuits as warranted.
Let me put on my deal-making hat and tell you where my instincts say this is going to come out. Tom Miller’s earlier signals, confirmed by a later report by Dave Dayen, is that the Administration wants a deal in six to eight weeks.
This is a naive approach given the state of play and is likely to backfire. You can only lock people in a room to do a deal (which given the number of moving parts and the lack of consensus even among the Federal regulators, is what this amounts to) if people have agreed to do a deal or you have leverage over them. This does not apply to either the AGs or the banks. Even worse, the Team Obama types can’t even get their own act in gear. The AGs when they signed up to a process that would be driven by the Obama Administration to serve its interests. They didn’t agree to the shape of the table and have every reason to decamp for this reason alone, that what was billed as a negotiation they would conduct with the banks is instead turning into cramdown as far as they are concerned.
The banks have a different calculus. They know the Administration and the AGs are shooting with blanks. The OCC reported in Congressional testimony that the eight week whitewash found only problems when “circumstances had changed”, like HAMP mod problem or changes in terms for active duty servicemen. So the Feds can’t make big threats to bring the banks to heel to do a deal. Similarly, the servicers know the state AGs don’t have a case either, save for robosigning abuses, which is not worth anywhere within hailing distance of the $20 to $30 billion being bandied about We’ve said it is inadequate for the broader abuses and is also too small to have any impact on the housing market. The objective should be to get the servicers to do or pay for principal mods that come out of investors, who’d be happy to have mods to viable borrower rather than costly foreclosures and sales of not-properly-maintained or secured properties, often in markets with a lot of inventory overhang.
But the banks DO know that if anyone got around to investigating, or if things grind on in court long enough, enough Bad Stuff is likely to surface that will embolden some AGs to go after them. And a couple of successful AG cases will lead to more private suites, perhaps even some class action theories. All the AGs have to do is start with low hanging fruit like the foreclosure mills (even an embarrassingly weak settlement with a Florida foreclosure mill yielded $1 million to the AG’s office, so these actions are probably attractive from an economic standpoint) and go up the food chain. The foreclosure mills, when attacked, often turn on Lender Processing Services, which implicates the servicers without violating attorney-client privilege.
So the banks know they are vulnerable if anyone decided to go after them in an organized fashion. So the one thing the AGs can offer that they might want it a broad release, which is exactly the thing we have said the AGs should not provide. How can you release a party when you don’t have the faintest idea of what they might have done?
And the disarray, plus the inexplicable time pressure, works against a sound deal getting done. As international negotiations show, multi-party deals take a lot more groundwork among the participants, and that is utterly wanting here. Artificial time pressure on people who don’t see eye to eye or aren’t persuaded a deal is necessary is likely to lead to various parties jumping ship. And it works to the advantage of the banks, who can simply hang tough, come to meetings, and play non-negotiable (which means either that the folks at the Administration are utterly clueless, or alternatively, are using the phony claims of a need for haste to provide the backdrop for conceding to the banks).
So I see either no deal or a very weak, bank friendly deal with a broad waiver as its centerpiece. And I’d bet the banks trade concessions that have an official price tag of at most $5-$7 billion. Plus given the weak track record of compliance on past servicer settlements and HAMP, there’s no reason to expect them to live up to that.
And if Elizabeth Warren puts her name on a settlement like that to try to increase her odds of getting the CFPB post, she will have proven she’s willing to sell out on what she stands for. I can only hope that she, like some of the Democrat AGs who can already see where this is going, would walk away from it instead.