Inside Financial Services

BofA’s Unfortunate DoJ Settlement

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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.

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!

11 Responses to “BofA’s Unfortunate DoJ Settlement”

  1. truth

    Tom, why are you telling the Emperor that he has no clothes on?

  2. Milkweed

    I thought “buyer beware” was the legal standard in this country. By what legal standard was BAC and the other banks supposed to guarantee investors of billions of dollars in MBS were doing the right thing? If the banks told these investors they were getting securities backed by prime loans and stuffed them full of sub-prime loans I could see the case against the banks. Unless I’m missing something here these investors knowingly bought securities backed by sub-prime loans and now they’ve gone sour had buyers remorse. By what legal standard were the banks supposed to protect billion dollar investors from themselves? Make me President and my first act will be to sue Eric Holder, the States Attorney’s general and Judge Rackoff for racketeering, extortion and gross abuse of power.

  3. World B

    The problem is Tom that you’re using business logic and fundamentals of fair dealing – and those principles have been thrown out the window.

  4. Ole Holsti

    What’s wrong? The too big to jail travesty. A few [say 12 or so] 20 year jail sentences would have sent a badly needed message to the banksters.

  5. Pat O'Brien

    The reason Angelo is still walking around is because no one was defrauded. The reps and warranties described what kinds of mortgages were in the MBS pools but the last several years of securitizations included disclaimers that a substantial portion of the pools may not conform to those reps and warranties. Apparently nobody read the fine print.

  6. Randall Grossman

    One might argue that what looks like the stupidest part of this agreement may actually be the only part of it that actually helps the bondholders. Unless I misunderstand the process, when BofA modifies a loan that is in default, reducing the principal, the amount of the principal reduction must be paid to the holders of the MBS of which the loan is a part. Thus, the bondholders do end up being compensated for what was a misrepresented loan. Yes, an undeserving borrower may also benefit, but at least the bondholders get something out of it.

    Unless, of course, BofA modifies a mortgage that it is carrying on its own books. In that case, as the NY Times noted, all that has happened is that the reserve for loan loss is released. Net impact to BofA is zero. Bondholders remain screwed. Borrowers who toughed it out and continued making payments on their underwater mortgages continue to be ignored. And, as you note, defaulted borrowers who had no business taking out the loan end up benefiting.

  7. Ken Greenberg

    It’s USSR justice. The Feds were thrilled when BofA took Merrill and Countrywide. Now the tune has changed. It runs our bloated, out of control government for about a day and a half. Maybe that’s the real agenda.

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