It hasn’t been hard to notice that the Administration has been engaged in a series of bank settlements with multibillion dollar numbers attached. As we’ve argued, the sudden show of a smidge more seriousness is undoubtedly meant to impress voters in the runup to the Congressional midterms as to the Democratic party’s bona fides in the “tough on banks” category.
The latest pact, a nominally $7 billion mortgage settlement over misrepresented residential mortgage backed securities, falls into the predictable pattern of first, there being much less there than meets they eye, and two, as a result, the agreement being a gimmie for the bank and its executives. We’ll go over that briefly in a bit.
But the Citi mortgage settlement was so obviously defective in other respects that to shellack it. As Susan Beck wrote, the deal had some particularly unsavory features. One was that it was structured so as to avoid court review. Clearly, no one wanted to risk Judge Rakoff-styple probings, particularly of the factual basis for the settlement. And as Beck notes, there was clearly pointed effort to say squat about what exactly Citi had done:
If you read the government’s , evidence of Citi’s actions, strong or otherwise, is hard to find. This document, which should contain the meat of the case, is all of nine pages long. It’s shockingly thin on details, largely relying on boilerplate to describe what most people who follow these cases already know: Citi sold RMBS that it knew were backed by subpar loans. And it doesn’t contain a single word about Citi’s massive CDO operation.
It’s important to remember that Monday’s statement of facts was jointly negotiated by the U.S. Department of Justice and Citi’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison. This raises the question of whether the government agreed to keep quiet about some of the most damaging evidence against Citi and its officers in exchange for $7 billion. Or perhaps the government had a weak case, but Citi still felt it was too risky to fight.
If you read the statement of facts, the only evidence mentioned is one e-mail from an unnamed trader. Beck states, incredulous: “That’s it—one email. Did Citi really agree to pay $7 billion because it was afraid of one email?”
Apparently the DoJ assumed the public would simply read its press release, which cheekily claims, “And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.”
A second issue that comes out of the review is that the successful effort to say almost nothing clearly protects individuals. The statement of facts does acknowledge a managing director was involved in a vague way. Nice to know the inmates aren’t entirely in charge of the Citi asylum. The entire CDO operation gets a waiver, but they aren’t even mentioned in the factual discussion (ahem, but CDOs were separate from RMBS, so that means at least one other managing director person had to be responsible).
Beck also points out that what on the surface looks like no real investigation was done, or that Citi paid up to have whatever was found out fully obscured, is particularly striking since the residential mortgage backed securities task force has 200 people tasked to it. 25 million documents were collected on the Cit case. Yes, but one might as, what exactly was done with them?
Now to the more standard problems with this mortgage settlement, some other warts. It’s not $7 billion. It’s $4.5 billion in cash and the rest is in various credits for borrower relief, which typically means a gimmmie for things Citi would have done anyhow.
And of that $4.5 billion, , $4 billion. $500 million is divided among various state attorneys general and the FDIC. California gets $102.7 million and New York, $92 million. As Dave Dayen pointed out by e-mail, Citi originally offered $7 billion, which clearly shows they would have paid more. The DoJ rejected that offer. Then Citi came back and made another $7 billion offer, but with the DoJ getting more of the total. That’s the deal that got done. So the DoJ couldn’t be bothered to work up a sweat to wring more out of Citi on this mortgage settlement. It was happy to take a slight sweetener for itself and call it a day.
What is revealing here is that the Administration seems to think that the public buys this sort of enforcement theater. The public has lost interest in these deals. They know the banks got away with murder and pacts that are cost-of-doing business level fines don’t get their attention. They want to see managers and executives prosecuted, or at least pay hefty fines (enough to inflict financial pain) and they’d like to see the bad acts exposed too. Of course, the reason this can never be allowed to happen is that that course of action would facilitate private litigation, and that might lead to uncontrolled outcomes, like exposure of really bad conduct (embarrassing the Administration for not going after it themselves) and hefty damages. As we wrote in 2010:
Early in 2009, the banking industry was on the ropes. Both the stock and the credit default swaps markets said that many of the big players were at serious risk of failure. Commentators debated whether to nationalize Citibank, Bank of America, and other large, floundering institutions.
The case for bold action was sound. The history of financial crises showed that the least costly approach is to resolve mortally wounded organizations, install new management, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them….
But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers…
Obama’s repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.
Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.
But five years of the same tired propaganda is now staring to wear thin. The only people who will buy the talking points that Team Obama will trot out to try to bolster Democratic party prospects are those who are already in the can. But Administration officials seem to believe that this sort of con job still works. While Obama may not be a lame duck quite yet, the quacking is getting awfully loud.