Banking Updates: More 50 State Settlement Follies; Moody’s Downgrade of Bank of America

I don’t mean to sound as if I am hectoring Shahien Nasiripour, since he has doggedly and successfully broken quite a few banking stories when he was at Huffington Post, which lead the Financial Times to snatch him up. That’s tremendous validation for a young reporter.

However, the conventions of reporting (and it may reflect FT style preferences) are having two unfortunate side effects on his latest article about the so-called 50 state attorney general settlement. The first is that his new piece has the unfortunate effect of making the deal seem more alive than it is. This process is beginning to remind me of the Vietnam peace talks, which dragged on for years and made progress only when the US decided to throw in the towel and used the negotiations to wrap it decision to leave in “Peace with Honor” packaging.

The second is that the story is organized around one new tidbit, and you learn much later in the story that it means less than it seems, and another tidbit mentioned in passing seems just as important as the one featured prominently.

Shahien got his hands on a memo from the Illinois attorney general which breaks a settlement of $17 billion (not $20 billion as generally rumored) down among the bank miscreants. Perhaps the reduction in total size is the result of some big states dropping out (more on that shortly), From the Financial Times:

Bank of America would pay $7.8bn…JPMorgan would pay $3.8bn, while Wells could pay about $3.5bn, according to people familiar with the document. Citigroup would be asked to pay about $1.4bn and Ally Financial, which is 73.8 per cent owned by the US Treasury, would pay $860m.

Now of course, all these numbers, and the fact that the two sides are meeting Friday makes it sound like the deal is moving along, right? Think twice.

First, this is one state’s back of the envelope breakdown. Not only has no other state agreed to it, Illinois isn’t even necessarily on board with it:

People familiar with the Illinois document warned that it did not represent the states’ position, just one agency’s view of where things stood.

Second, as we’ve said before, there is still no agreement (and no news of further progress) on the big divisive issue, which is what sort of release the banks get for their dough. That is tantamount to saying “I want to spend $10,000 to go somewhere” and having no idea of either where you are going or what the mode of transport is.

The article says California wants principal reductions and is meeting with banks separately, which is a pretty strong signal that they are out of the talks, along with New York, Delaware, Nevada, Massachusetts, and Minnesota. That is pretty significant and is in contradiction to the impression conveyed by the piece, that the negotiations are moving apace.

Finally, the article mentions that:

About 80 per cent of the settlement figure, earmarked for the federal government, could be used to fund another round of debt and payment reductions for struggling US homeowners, people with knowledge of the Illinois document said. That would be split between principal reductions on first-lien mortgages and junior liens; payment forbearance for unemployed borrowers; and short sales, blight remediation and transition assistance for homeowners to move into rentals.

The remainder, about $4bn-$4.4bn in cash, could be designated for the states, which then would divide the proceeds to fund a variety of programmes, including assistance to borrowers. About half that amount could be used to pay up to $2,000 to an estimated 1.1m aggrieved borrowers who allege they were harmed by improper practices.

80% to the Federal government? I wonder if this is based on an acute calculation of how little a state AG can get an look like a hero at home. Presumably the total would be allotted to the participating states in some manner (number of foreclosures or defaults?). Take 20% of $17 billion and divide it by 45 states. You get an average of $75 million. That is chump change relative to the damage done. It doesn’t even begin to cover the recording fees evaded through the use of MERS (the city of Dallas estimates that they are at least $58 million and could be as high as $100 million. Some of that liability may redound to the banks as originators and packagers).

On a different front, just as banks are coming under more attack, Moody’s signaled its doubts that Uncle Sam will be there when banks need them most. Moody’s downgraded Bank of America’s long term debt rating by two grades, from A2 to Baa1 and its short term debt rating by one notch. It lowered Citi’s short term debt rating one notch, from Prime1 to Prime2 and affirmed its long term debt rating. It kept Wells’ short term debt rating in place and cut its long term debt rating from A1 to A2.

Like the downgrade of the US, the concern is political. As the Bank of England’s Andrew Haldane explained in his paper, The $100 Billion Question, rating agencies score banks on both a stand alone basis and with the assumption of government support:

Table 2 looks at this average ratings difference for a sample of banks and building societies in the UK, and among a sample of global banks, between 2007 and 2009. Two features are striking. First, standalone ratings are materially below support ratings, by between 1.5 and 4 notches over the sample for UK and global banks. In other words, rating agencies explicitly factor in material government support to banks.

Second, this ratings difference has increased over the sample, averaging over one notch in 2007 but over three notches by 2009. In other words, actions by government during the crisis have increased the value of government support to the banks. This should come as no surprise, given the scale of intervention. Indeed, there is evidence of an up-only escalator of state support to banks dating back over the past century.5

As the New York Times noted:

The downgrades were driven by Moody’s conclusion that the federal government was less likely to step in and provide support for a faltering big bank the way it did after the 2008 collapse of Lehman Brothers, when Washington executed a series of actions including capital infusions and credit guarantees to halt the spreading panic…

While Moody’s said it “believes that the government is likely to continue to provide some level of support to systemically important financial institutions,” the agency added that the government “is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled.”…

“Now, having moved beyond the depths of the crisis, Moody’s believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that the contagion could be limited,” the firm said in a statement. Even so, Moody’s said it doubted whether a global financial institution could be liquidated “without a disruption of the marketplace and the broader economy.”

It sounds as if Moody’s is confirming our conclusion of months ago, that a Dodd Frank resolution is not going to be the pretty, surgical event that the FDIC fantasizes it will be, and a combination of undue confidence in an untested scheme plus political pressures against bailouts will lead the authorities to hazard trying to resolve a really big bank.

In some ways, this downgrade reflects the very real possibility of an Obama loss. Geithner or a like minded successor (Jamie Dimon, eek) would be particularly attentive to the pet needs of the banking industry and would continue the “No more Lehmans” policy if at all possible. But a Republican who came in with meaningful Tea Party support might well consider it a badge of honor to let a big bank fail. And we may have the opportunity to see how that plays out sooner than we’d like.

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  1. LucyLulu

    Is the rating agencies view of a higher likelihood that a big bank would be allowed to fail strictly related to a Republican winning in 2012, or is there some belief that there is less support irregardless? Didn’t the measures to provide support to the EU banks last week influence their perception, or was that fundamentally different in some way that I am missing? I’ve also been curious how little media attention the Fed action last week has received, particularly from conservatives.

  2. Economista Non Grata

    I frankly do not see how BAC can survive, regardless of the settlement…. The chickens are coming home to roost and it would be wise to unwind this institution while we can, instead of when we have to…..

    Remember, history is not gradual, it jumps at you and rips your face off…. Someone needs to bust a move on this now, instead of later….

    Yves: I appreciate your diligence and your articulation in this matter, however, I am certain that you have underestimated the fragility that is incumbent on BAC’s balance sheet…. They might not make it through the weekend….!

    Best regards,


    1. leapfrog

      Oh, Econolicious, if what you say is true (Banksters of America might not make it through the weekend), that’s music to my ears. I’m in a suit with them right now and am hoping they FAIL. They claim to “own” my loan, yet have produced no proof in discovery. I hope they go down in flames.

      1. Economista Non Grata

        “….They might not make it through the weekend….”

        Is a metaphor… Everyone holds their breath until it’s “Miller Time” on Friday and then breath a big sigh of relief when it’s time to go home for the weekend….

        BAC is on life support, all of their counter-party facilities, are vigilantly on edge….. We all know that BAC is insolvent and there is no possibility of a TARP stile of bailout, so it’s like a game of musical chairs… There are fifty players and one chair. We all know the music is going to stop “soon” and we are all hoping that when it does , we are the closest to the chair…. All I can tell you is that it will stop, if not today, tomorrow, and when it does, you’re going to see hair pieces flying through the air….

        As it stands right now, hedging a BAC counter-party obligation is a loosing proposition, it generates negative cash flow, that in it’s self, speaks volumes as it relates to how thin the ice is….

  3. indio007

    The claim for lost recording fees is a non-starter. The banks are under no legal duty to record assignments of mortgages in the public records. They can also still foreclose as long as they are in possession of the original mortgage and enter it into court.

    The issue that should be getting hammered home is the tax issue. The mortgages were sold and resold within the MERS system. No taxes where paid on these conveyances at ANY level of government. This was the true purpose of MERS , to avoid the taxes not the recording fees.

    1. Tanuki

      In NY, the mortgage transfer tax IS the recording fee. No, recording, no tax. How many other states is this the case in?

    2. beowulf

      “There ought to be a law against that”, Part XXXIV
      18 USC 1005. Bank entries, reports and transactions
      Whoever makes any false entry in any book, report, or statement of such bank, company, branch, agency, or organization with intent to injure or defraud such bank, company, branch, agency, or organization, or any other company, body politic or corporate, or any individual person, or to deceive any officer of such bank, company, branch, agency, or organization, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation… Shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both

      The County is not a “sovereign,” but rather a “body politic and corporate.”

      Ho-hum, so each MERS transaction that avoided payment of county recorder’s transfer tax was a separate count of bank fraud, add it to the pile.

    3. Yves Smith Post author

      That is not correct in title theory states, and Oregon has a state recording law. And I said “damage done” not legal liability. People who have a nuclear weapon (questioning the validity of contract formation, suing the trustees and the originators for ongoing false representations, to name a few) could force the banking system to its knees if they chose to, so the basis for a settlement (as to what gets recouped) have a awful lot of leverage.

      And not one will sue on taxes, I’ve discussed repeatedly that the IRS has made clear it is not going there. Tax law does not map onto contract law. They can deem the transfers to be valid because they parties made a sorta effort (no joke, that is the IRS’s justification).

      1. Fraud Guy

        Is the IRS logic on the validity of the transfers based on:

        1) The fraudulent attempts to assign the notes well after the allowed period (i.e., robosigning and false affadavits)

        2) The administration position that we must move forward

        3) The IRS realizing the resources required to pursue all of these actions would be better spent chasing after potential tax evaders who can’t afford attorneys

  4. monday1929

    “looks like Moodys confirming our conclusion”- why look for validation from a failed institution? If anything I would worry about being on the same side of an opinion as Moodys. But the saving factor is Moodys assumption that we are out of the depths of the crises- that offers assurance that the worst is yet to come.

  5. Mack

    If bond ratings primarily affect the cost to a business of borrowing, why would it matter to BoA if their bonds drop a couple of points — don’t they have access to all the free money they want from the gov’t?

    I know it can’t be that simple, so what am I missing?

  6. ep3

    “about $4bn-$4.4bn in cash, could be designated for the states”

    yeah Yves, here in Michigan we have Koch man gov. Snyder who has eliminated the main business tax and is now working on eliminating the other main business tax, the personal property tax. He replaced those with a tax on pensions. So our state, which is already the economic abyss (the west side of the state says it’s because of the lazy union autoworkers on the east side of the state), is gonna take that money and pay the daily bills, not help homeowners.

  7. kravitz

    Moynihan as a can-can girl with boas and fishnet stockings? Oh, sorry, googled ‘folies bergere’ by accident.

  8. Icarus

    I am not an investor but a front line HAMP recipient of an old Countrywide/now BAC home loan. Something changed recently I think involving Dodds/Frank.

    Maybe someone hear can explain it. I called BAC to follow up on a late loan payment. I was treated with respect and dignity! This has not happened in the last 12 years. My late payment was not disastrous as it has been in the past. Not only did the usual highway robbery take place; the representative claimed to have no idea what I was talking about. I now have hundreds in my pocket that I will use to start a small local business.

    If this is truly happening all over than that would explain why banks are so glum these days. Without the ability to rob me of hundreds from my stupid mistakes, they take tens. Frankly, if BAC breaks up, I smell sunny days ahead and more opportunity for my middle class brethren.

    How many more are there like me? If many, Obama gets re-elected. If not, bye bye Obama?

    1. Fraud Guy

      Yes, I too have noticed the inability of BAC Home Mortgage LLC (now again called Bank of America on the most recent statements) to post a late fee on some recent statements.

      However, they are still reclassifying over $10,000 in tax payments rolled into the principal as an additional $10,000 owed in escrow, so all has not changed.

  9. Panos Lambrou

    Just received email from Jack Conway AG of Kentucky. He appears to be bailing out of 50 AG group. Here is email quote:

    “Hi, this is Kentucky Attorney General Jack Conway. I wanted to make sure you heard about an important issue.

    The same Wall Street banks whose irresponsible actions led to our nation’s economic collapse are now pressuring all 50 states to give them legal immunity. The banks want to block any criminal or civil accountability for actions that have yet to be investigated.

    Attorneys General from Delaware, Minnesota, Nevada and New York have been fighting back. Today, I want to make a clear statement in support of Wall Street accountability and against immunity for banks — and I ask you to join me on this statement:

    “Today’s economic crisis was caused by Wall Street acting improperly. Every American has paid the price — with families losing their homes, investors losing their money, and many Americans losing their jobs. There should be absolutely no criminal or civil immunity given to banks for activity that has not yet been investigated.”

    If you agree, add your voice to this statement by clicking here — so America hears our voices together.

    Frankly, all elected leaders owe it to their constituents to take this position. If we speak up together, more and more of them will. Sign here.

    Today, by adding my voice to this issue, along with the Progressive Change Campaign Committee, we are adding momentum to the fight for Wall Street accountability.

    These next couple weeks are critical. Key meetings and discussions will determine if Wall Street banks get immunity — regardless of what they may or may not have done.

    Now is the time for the public to stand up. Click here to add your voice to the above statement today — then, tell your friends.

    Together, we can hold Wall Street accountable to Main Street. Thanks for being a bold progressive.

    — Kentucky Attorney General Jack Conway”

  10. ReaderOfTeaLeaves

    Today Barry Ritholtz had an item questioning whether we are seeing the end of the Bernanke Put. (Here’s hoping!)
    I thought it a very interesting sign of the times.

    At this historical moment, waiving criminal action and bailing out banks is going to be political suicide, whether the FT reports it that away, or not.

    We have not yet heard political campaign rhetoric that explains why banks would function better as utilities, but I interpret this post and Barry’s as two breadcrumbs on the path toward newer financial models.

    One more odd observation: in August, a large Puget Sound credit union probably wrote more mortgage loans than any month in their history. Anecdotally, I hear their new accounts are growing steadily. This is only one credit union in one region, but if these kinds of shifts are happening nationwide, then it is more evidence for depth of public antipathy with these TBTF monstrosities.

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