Bank of America, JPMorgan Chase, Citigroup: these names have become synonymous with the housing bubble that burst in 2008, leaving Americans holding nothing more than a soapy residue of having dreamed of living too large. Okay, that sentence may be getting a bit sentimental, but as the U.S. economy is recovering from the subsequent recession, it’s becoming easier to forget the reality of these financial institutions’ part in the Great Recession following 2008 –even for the U.S. Department of Justice, say some securities attorneys, who are watching the settlement talks unfold. Because now, the U.S. DOJ has come to collect on the bill that the American taxpayers footed when the White House administration decided that a bail out was a better option than letting the banks (and their consumers) go under. Only, this article in CBS News makes us wonder if that bill is anything close to fair.
JPMorgan Chase issued $450 billion worth of mortgage bonds between 2004 and 2008. The bill they were served by the DOJ—and that their lawyers settled on—was no more than $13 billion. Bank of America, who sold $965 billion in mortgage-backed securities to Fannie Mae and Freddie Mac from 2004 to 2008 is attempting to strike a deal with the U.S. Government for only $12 billion. Currently, their lawyers are at an impasse with the federal prosecutors, who are asking for $17 million. Which, let’s be honest, is still paltry in comparison to the $965 billion they’re responsible for.
Citigroup has settled too, with its securities attorneys haggling the feds down to $7 billion. And lest the American public feel cheated by these meager compensatory figures, U.S. Attorney General Eric Holder made a statement in a press conference that the “settlement doesn’t preclude prosecutors filing criminal charges against the bank and its employees.” Keep in mind that to date, “no high-ranking bank executive has gone to jail for their role in the financial crisis,” as the DOJ has proven to be extremely reluctant in criminally prosecuting Wall Street crimes.
The most troubling aspect of the settlements for securities attorneys like Douglas J. Shumway, though, isn’t the comparatively small dollar amounts that the U.S. DOJ is settling for; it’s the way that part of the $7 billion will include $2.5 billion of “consumer relief.” Referring in part to mortgage forbearance for homeowners who are upside down on their houses and financing affordable rental housing developments for low-income families in high-cost areas, this consumer relief strategy could actually prove to be less of a penalty and more of a profit for Citigroup—not even a slap on the wrist. “Mortgage forbearance is known to be far less effective in preventing default and foreclosure than principal-reduction, while rental housing for its part might simply become another revenue line for Citi—a revenue line that is partly dependent on homeowner default and foreclosure itself.”
Like Shumway and other securities attorneys, Cornell law school professor Robert Hockett sees the danger in such a term in the settlement: “It would be a tragic irony if the same behavior that brought a housing price bubble, bust, post-bust negative equity and consequent foreclosure were now to elicit a ‘penalty’ that enables Citi to profit from foreclosure itself.”