Bank Settlement Grade Inflation: High Bullshit to Cash Ratio in $17 Billion Bank of America Deal

Over the last year, the Administration has entered into a series of bank settlements over various types of mortgage misconduct. The sudden rush to generate headlines from misdeeds that have been covered in the media in lurid detail during and after the crisis looks an awful lot like an effort to stem continuing criticism over the abject failure to punish banks and more important, their execs for blowing up the global economy for fun and profit, particularly since the Dems are at serious risk of losing control of the Senate in the Congressional midterms.

But as much as the media dutifully amplifies the multibillion headline value of these pacts, we’ve reminded readers again and again that all of these agreements have substantial non-cash portions which are ludicrously treated as if they have the same value as cold, hard cash. As we’ve reminded readers often, it’s critical to keep your eye on the real money, since the rest of the total is almost without exception things the bank would have done anyhow (or even better, giving banks credit for costs actually borne by others, like modifying mortgages that the bank merely services, meaning the bank gets a credit for a writedown imposed on an investor).

A telling trend in this rash of deal-making is that the bullshit to cash ratio has been rising. Notice the pattern:

November 2013 JP Morgan settlement of FHFA, other Federal, and certain state mortgage claims. $13 billion headline value. $9 billion in cash. Bullshit to cash ratio: 44.4%

July 2014 Citigroup mortgage settlement over misrepresenting residential mortgage backed securities. $7 billion headline value. Cash portion $4.5 billion. Bullshit to cash ratio: 55.6%

August 2014 Bank of America settlement. $17 billion headline value. Cash portion $9 billion. Bullshit to cash ratio: 88.9%

Now admittedly, none of these approach the mother of all bullshit settlements, namely, the Federal/49 state mortgage settlement of early 2012, whose real purpose was to take pesky state attorneys generals out of the business of getting too inquisitive about mortgage chain of title issues, which Georgetown Law professor Adam Levitin more colorfully called “securitization fail”. The totals kept moving around prior to the filing of the settlements with each bank, and by then, the media had lost interest in the particulars. Since these pacts are really all about managing public perception rather than punishing bank crimes, the rough and ready figures touted at time of the initial announcement are most germane.

February 2012, Federal/49 state mortgage settlement. $25 billion headline value. “Less than $5 billion” in cash, so charitably call it $5 billion. Bullshit to cash ratio: 400%.

The difference between the much-ballyhooed Federal/state settlement and the latest round is their intent. The Federal/state deal was a “get out of liability for almost free” card, a cynical effort to paper over the still-festering rot of the failure to handle mortgage securitizations in accordance with their carefully crafted and rigid contracts, along with related, widespread foreclosure abuses. By contrast, the latest round of settlements deals with misconduct that even though the banks are getting off on the cheap again, the underlying abuses don’t strike at the heart of the too big to fail mortgage securitization complex. So the Administration can feign being a little more bloody-minded. Even so, the greater and greater proportion in recent deals of funny money relative to real dough show that this is simply another variant of an exercise in optics.

Update 12:20 PM: The deal was announced this morning. The final bullshit to cash ratio is less bad than the initially leaked level, but still worse than other recent deals.

August 2014 Bank of America settlement. $16.65 billion headline value. Cash portion $9.65 billion. Bullshit to cash ratio: 72.5%


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    1. Jim Haygood

      Like the price-earnings ratio, by construction Yves’ bullshit/cash ratio is susceptible to blowing up to infinity if the cash portion declines to zero or even goes negative (that’s when gov hands money back to the banks).

      Cash as a percentage of the total settlement (analogous to earnings yield) would normalize between 0 and 100%. But a 400% BS/C ratio makes for better headlines, that’s for sure.

      1. Steve H.

        Cash is finite, bullshit may be limitless.
        Bullshit can compound exponentially.
        If the cash portion is zero, that is not zero bullshit, that is total bullshit. And yet does not indicate the ‘End of Bullshit.’
        These would lead to putting the finite portion (cash) in the denominator.

        Your point about negative cash portion, however, does bear further scrutiny.

        1. Mad John

          There is no difference between cash and bullshit. Last time I looked at a dollar it is backed by nothing more than government bullshit dressed up pretty and called “full faith and credit”.

        2. OpenThePodBayDoorsHAL

          As Yves has stated before, the one, single, all-up lesson that banks have learned from the crisis: *Crime Pays*. Simple as that.
          No complicated theories or formulae required, no socio-politico-economic calculations necessary. The blame lies squarely at the feet of the “Justice” Department and the person who gives them their daily marching orders: our golfer-in-chief Barack Obomba.
          (For the record I voted for McGovern, Carter, Carter, Dukakis, Mondale, Clinton, Clinton, Gore, Kerry, and Obomba V 1.0)

  1. Roy Price

    Criminal prosecutions of white collar offenses are complex but alternatives exist. The little law firm in Mississippi (of all places) collected billions for taking on the tobacco companies. Surely there should be a law firm somewhere in America that will undertake a class action suit, on behalf of the 2008 shareholders in big banks, against the top management and directors. The shareholders had a lot les reason to be afraid than the smokers.

    1. Lune

      Actually, that little law firm is already on to it. Check out:

      It’s related to high frequency trading and not mortgages, but still worth a shot…

      (tl;dr version: law firms who first successfully sued Big Tobacco have filed a class action lawsuit against the exchanges for giving HFT firms access to order data faster than they deliver the same information to the consolidated feed (SIP) that everyone else uses).

  2. Rodger Malcolm Mitchell

    Cash fines actually damage the economy, as they (like taxes) remove dollars from the economy. The more effective, less damaging approach is to try and jail the perpetrators of the crime.

    Taking billions from the economy, while doing nothing to the perpetrators, has no beneficial effect at all.

    1. Bart Fargo

      Or just shoot em, China style. If America insists on having a death penalty, it ought to apply equally to all social classes. No sense letting criminal executives off with an all expenses paid stay at Club Fed when young black men are being summarily executed in the streets for much less (and often nothing at all).

  3. David in NYC

    There’s a quick rule of thumb for the lawsuits brought on behalf of Fannie & Freddie, which alleged securities law violations. It’s about 15 x 1.

    The GSEs always bought the most senior AAA tranche in an RMBS deal, generally less than 40% of a deal’s total capitalization. All of the tranches subordinate to that most senior tranche recovered zero principal. Since the GSEs recover around 10% of their of the face value of their investment, the subordinate tranches should recover 100%.

    These were securities violations that harmed anyone who bought into a particular deal, not just the GSEs. So far, the GSEs have recovered around $22 billion. If the banks were held accountable, they would need to pay out—at least– another $330 billion.

  4. Jim

    And according to a news report: “Bank of America Corp. BAC +3.06% will pay roughly $4 billion less to the government after-tax than the $16.65 billion it agreed to in a settlement over soured mortgage securities, because parts of the settlement will be tax deductible, the bank said Thursday.”

    So there’s even more filler than meets the eye.

  5. Man in a Barrel

    Parts of the settlement are tax deductable? Gee, that’s great. I assume my speeding fine will also be tax deductable as a cost of employment.

  6. Teejay

    Absolutely one of the best posts by Yves evar! “Bullshit to cash ratio” priceless. I’ll be passing it on to the White
    House for what it’s worth.

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