The Wrong Foreclosure Settlement

A comfortable formula has emerged in the past decade for dealing with corporate crime, and it goes like this: Government authorities amass evidence of wrongdoing, confront malefactors with this evidence, and then the two sides agree to a "settlement" to resolve the charges.

Typically these settlements involve financial penalties which include both fines and restitution, as well as detailed promises on the part of the malefactors to change their behavior. What the settlements rarely include is an admission of criminal wrongdoing by any individual executive or punishment of those responsible. These settlements usually don't even include an explicit acknowledgment of wrongdoing at all.

Oh, and one other thing: the financial penalties are paid with money that might otherwise go to shareholders (who did nothing wrong) as opposed, say, to coming out of the bonuses of the execs who actually screwed up.

The SEC recently got zinged by a federal judge for arranging one of these cushy deals with Citigroup which led the SEC to modify its policies on such settlements.

Still, don't look now, but the mother of all settlements is shaping up between top banks and state attorneys general, with the Obama Administration playing a central role. Yes, this is the same foreclosure settlement we've been hearing about for over a year. Reportedly it is now so close to a done deal that Obama may mention it in his State of the Union address tomorrow night.

The details of the settlement aren't public yet, but appear very troubling. In a letter last week to key federal officials, as well as Iowa State Attorney General Tom Miller, Senator Sherrod Brown expressed concern that the banks could pay for the settlement using other people's money -- like pension fund investments -- as opposed to taking a hit on their own balance sheets, thereby getting away "without sacrificing anything."

Brown also expressed fear that the suit could preclude investors who lost money on mortgage-backed securities from further actions to recoup those losses.

New York State Attorney General Eric Schneiderman has long been a critic of the AG settlement out of fear that it will make it much harder, if not impossible, to go after the banks for criminal wrongdoing down the line. Tom Miller has said a settlement wouldn't preclude future such action, but come on: In the court of public opinion at least, it will be hard for authorities to prosecute banks if it already looks like justice has been done with this settlement.

Schneiderman has good reasons not to want the rug pulled out from under him. As I argued last year, it shouldn't be all that hard for Schneiderman to make a criminal case against the banks, using the Martin Act, on the very specific charge that they knowingly misled investors about the risks of mortgage-backed securities. In a nutshell, the banks kept peddling this stuff even after they realized it was toxic -- which is a crime.

On its surface, the proposed settlement has many good aspects -- like channeling billions to foreclosure relief and getting the banks to change their servicing practices. But look closer and few of these details are very appealing. Homeowners are under water to the tune of hundreds of billions of dollars, so $20 billion in help for those struggling won't make much of a difference. And that assumes that these relief funds would be effectively deployed. The banks have a terrible record of helping distressed homeowners in response to earlier pressure and mandates. It's also hard to trust them when it comes to changing their abusive mortgage servicing practices.

All this and more explains why demonstrators were protesting today outsite the Chicago hotel where officials were said to be putting the final touches on the foreclosure settlement.

President Obama has been on the right track lately, striking a populist tone and siding with ordinary Americans against powerful interests. The last thing he should do is use his State of the Union address to announce a sweetheart deal with America's biggest banks.