BofA’s Unfortunate DoJ Settlement

Analysts, investors, and regulators may be cheering Bank of America’s decision to settle with the Justice Department for $16.65 billion, but I’m at a loss to understand why. Along that line, I have a few questions:

• Where the heck did that $16.65 billion number come from in the first place? In a sane-ish world that had at least a nodding respect for the notion of fairness, the size of punishment would bear some relation to the severity of the offense. In this case, BofA and its predecessors mischaracterized the quality of mortgages it sold to investors; as a result of those mischaracterizations, the investors suffered credit losses. Easy to understand. BofA ought to make those investors whole. But that’s not what’s happening here. Virtually none of the $16.65 billion is going to an actual wronged party. Instead, it’s being paid mainly as civil penalties to various state and federal agencies, as well as going toward some consumer relief. Why does all that add up to nearly $17 billion? Who can say? I read the “Statement of Facts” related to the case put out by the Justice Department. It’s long on email excerpts from the likes of Angelo Mozilo, but short on real data—like, say, how much money was lost as a result of these misbegotten deals. Nor did I see anything like an admission by BofA that it had done anything so bad that it justified coughing up so much money. For all I can tell, the $16.65 bil number occurred to Eric Holder in a dream one night. Perhaps more likely, it’s roughly what BofA generated in pre-tax earnings last year. But the settlement size apparently has nothing to do with the scale of wrongdoing BofA actually committed. This isn’t justice; it’s a shakedown.

•  Why are defaulted borrowers getting even a dime? The agreement calls for $7 billion in consumer relief, via tools such as loan modifications. I’m having trouble understanding how defaulted homeowners can be considered victims deserving of restitution. They knowingly and willingly entered into a contract with a lender. Either through bad luck, sloth, or something worse, they failed to hold up their end of the contract and so lost their homes. That’s how mortgages work! Actually, many defaulted borrowers can be seen as net winners: the foreclosure backlog became so severe as the housing market collapsed that often borrowers were then able to live rent-free in their properties for months. Now they’re supposed to get even more? Even the banks’ severest critics say that these people never should have been loaned money in the first place. Fair enough. If that’s so, they shouldn’t be rewarded for accepting those loans to begin with.

• How is it fair for bondholders to be doubly hurt? If anyone counts as a real victim in this whole mess, it’s MBS investors. They were the ones, recall, that were sold securities that weren’t of the credit quality advertised, and suffered heavy credit losses as a result. Yet not only does this deal provide scant relief for those investors, it hoses them even more by insisting on further mortgage relief for borrowers. So principal will be reduced, and terms eased—often at the expense of bondholders. Again, not only have the investors not done anything wrong, they’ve already taken some severe hits. This is unfair in a deeply fundamental way.

• Why does BofA think this agreement really will put the whole mortgage mess behind it once and for all? Have you seen the headlines following the deal? “Few seen aided by BofA settlement.” “Bank of America’s $16 Billion Mortgage Settlement Less Painful Than It Looks.” Among certain big-bank critics, no dollar amount of fines is enough and no punishment is too severe. It’s not clear to me that a lot of these people and groups don’t have Eric Holder’s ear. Government is capricious and—as we’ve learned following the DoJ-BofA talks all this time—negotiating with the government can be entirely one-side. The fines banks have paid now contribute up a material portion of at least one state’s budget. It’s easy to imagine regulators coming up with one excuse or other for making one more trip to the well.  What’s to stop them?

There’s no doubt in anyone’s mind that as the housing frenzy peaked, banks (BofA included) did some things they shouldn’t have done. They should be held accountable. But by now BofA has paid out nearly $75 billion in penalties, according to the Wall Street Journal. The size of the penalties seem increasingly arbitrary. They appear to have become less payouts by the bank for the purpose of writing a wrong, and more like shakedown money paid to get a thug to go away.

What do you think? Let me know!