The People vs. Federal Bank Settlements and Liquidity Rules

Last week, in an interview with Bloomberg News, former Countrywide CEO, Angelo Mozilo gave the nation the middle finger. 

He expressed zero remorse or culpability for his very personal (and personally lucrative) role in the subprime crisis that catalyzed a global economic recession. Apparently baffled by a potential lawsuit that could be levied by the Los Angeles US Attorney’s Office, he said, ““Countrywide didn’t change. I didn’t change. The world changed.” After blaming the world, he ended his segment by stating, “We didn’t do anything wrong.”

To him, the culprit was the real estate collapse itself. The same excuse was used by Big Six bank CEOs before multiple Congressional hearings and business news hosts. “how could we have known prices could GO DOWN?” By placing the blame on the ‘market’, they spun their actions as reactive or ancillary to its apparently random whims, as opposed to proactive on practices leading to crisis events.

The more temporal distance from those events and airtime given to the bankers that inflated the market before crashing it, and Treasury Secretaries that did ‘what they had to do’ in an emergency, the more Mozilo’s narrative is cemented in the main annals of history and the plight of the public is rendered a footnote. 

Yet, it was not just the loans themselves, but more so, the immense and profitable re-packaging and global re-distribution of those loans in a pyramid of toxic assets wrapped with credit derivatives that blew up in the face of the nation and the world, The economic implosion that followed ignited by the weight of such epic fraud and CEO directed salesmanship, impacted initial borrowers with conditions beyond their control, on top of initial fraud and voracious pushing of those loans to begin with. Thus, banks concocted $14 trillion worth of assets using $1.5 trillion of high-interest loans, compounding and adding to each bit of fraud, instability and risk along the way.

Forbes ranked Mozillo one of the top ten highest paid CEOs in 2006. By 2009, the SEC charged him with fraud for lying about the quality of the loans he sold to Bank of America and insider trading for pocketing $140 million from selling his stock when he knew those loans, and his company, were crumbling. He wound up paying a $22.5 million fine to settle the charge of misleading investors and $45 million for the insider trading charge—leaving him a cool $72.5 million.

But that’s in the past, and his recent denials merely reinforced the stances of Big Six bank leaders such as JPM Chase’s Jamie Dimon and Goldman Sachs' Lloyd Blankfein, who expressed a modicum of media-trained contrition only after their settlements were done and dusted.

Much of the mainstream media finally got it right though, characterizing the Bank of America’s “record” $16.65 billion settlement for the bogus deal it is. Only $7 billion of the settlement is remotely slated for borrowers, and even that is absent any binding rules. 

The reality is, the borrowers that should get the most assistance—not because they embellished applications as the blame-the-victim folks say—but because they were duped by bankers and then crushed by an economy turned on its head due to fraudulent bank practices that were federally subsidized - are the ones that lost their homes years ago. Absent a settlement that makes banks buy them new homes, they remain screwed.

The overall tenor of the settlements is worse than their feeble size and structure. Department of Justice Attorney General, Eric Holder’s John Wayne we-got-em attitude belies the most broken of systems—one that leaves fraud, embezzlement and grand larceny unpunished, and stokes rampant wealth inequality in the process.

So far, the Big Six banks—JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs (and nominally Morgan Stanley)—and their expensive (and largely tax deductible) legal teams have successfully negotiated about $106 billion in mortgage (fraud) related settlements with federal or state governments. Of this, given the language of their settlements (not the benevolent press release versions), at the most $32 billion may get to some borrowers one day. Even that depends on banks upholding promises to do things like reduce existing principal balances that would only help people who haven’t already lost their homes. Banks might also provide minimal funds for people with the stomach for endless phone calls with "customer-service" representatives to access them. These, however, have proven relatively fruitless over the past six years since Obama unveiled his HAMP program—which was supposed to require from banks what these settlements do.

In addition, the Big Six settlements are negligible compared to the damage their practices (and the practices of the investment banks they bought at the onset of the crisis rendering them bigger) considering that since 2006, there have been foreclosure actions brought against nearly 15 million homes. With an average value of about $191,000 per home, the total value represented by those foreclosure actions is approximately $2.8 trillion - a far cry from $106 billion.

Let this sink in. Our government and bankers settled on $32 billion in maybe-aid to borrowers relative to $2.8 trillion of foreclosed properties many of which are being scooped up by hedge and private equity funds financed by the same big banks. Not only that. These banks have been able to access money at close to 0 percent interest courtesy of the Federal Reserve for nearly six years. Yet, rather than reducing mortgage principals with that extra cheap money, they stockpiled a record volume of $2.5 trillion in excess reserves at the Federal Reserve for which they are reaping 0.25% interest—higher interest than they give their mere mortal customers. 

The Big Three banks bagged some major headlines for their settlement figures. But the devil is in the details of who gets the money. Bank of America’s largest $16.65 billion settlement is part of $61.6 billion in government-negotiated mortgage-related penalties. Of these, only $15.6 billion is vaguely slated for borrowers.  

For Citigroup, the total value of federally settled penalties of $13.35 billion includes just $4.29 billion for borrowers. For JPM Chase, total federally-settled penalties tally $21. 76 billion. Of this, $8.2 billion might wind up with borrowers one day.

Of the $106 billion in Big Six bank settlements, just $1.68 billion are with the SEC whose job it is to protect the public from securities violations (which over-valued toxic assets comprised of fraudulent loans are in my book, but I don’t run the SEC.) 

Compare that with a litany of items of power and wealth inequality in motion. First, at the height of the government-sponsored bailout and subsidization period of late 2008 through early 2009, more than $23 trillion of loan facilities, subsidies and other aid were offered to mostly the Big Six Banks. Second, Wall Street bonuses for the time from the settlements and through their negotiation periods (2006-2013) were $221.6 billion. 

Third, the Fed has compiled a $4.4 trillion book of Treasury and mortgage securities to keep rates down and securities prices up, providing banks a metric with which to mark similar mortgage securities on their books at artificially high prices, without having to alter mortgage principals for borrowers, as part of the bargain. The Fed claims this strategy is to create jobs, not to reinvigorate banks and bank bonuses.

Finally, the total assets of the Big Six banks are valued at $9.6 trillion. On September 4th, US regulators, including the Federal Reserve, presented their idea for protecting us from future big bank risk– something called a new liquidity rule. Under this rule, each big bank would need to stash away $100 billion in cash or 'cash-like' assets in case of emergencies, a big bank piggy bank if you will. But, all the new rule does is require big banks to hold a whopping 1% more cash then they did before the crisis.

Banks lobbied regulators the same way they settled with the justice department, ultimately getting off the hook for potentially having to hold $200 billion instead of $100 billion, less they not be able to speculate with the extra $100 billon (they argued that extra $100 billion was for extending credit to customers). 

To put this new rule into perspective, consider that in 2007, before the financial crisis, JPM Chase held $40 billion in cash vs. $1.5 trillion of assets, or 2.7% of them. Under the new rule, it would need to keep $100 billion in cash vs. the $2.4 trillion assets it now holds courtesy of the government triarch of former Treasury Secretary Hank Paulson, former NY Federal Reserve President-cum-Treasury Secretary Tim Geithner, and former Federal Reserve Chairman, Ben Bernanke, or 4%. This exercise is not about fashioning a broad financial safety net—it's just another regulatory mirage presented as reform.

Absent convictions, or at least a public trial where at least arguments over what constitutes felony fraud and extortion can be exposed, these settlements reflect just 1% of the Big Six bank assets, all of which grew since the crisis began, on the back of government and Fed policy and support. Rather than being a determinant of justice, they represent a reinforcement of the power oligarchy that aligns government and banking elites on one side of the economy and the broader population on the other. None of this bodes well for the next crisis.