The Justice Department is bragging about the $37 billion in fines they’ve assessed related to mortgage-backed securities as well as trumpeting the fact that they’ve started to rake in penalties that exceed the cost of operating the department. The latest and greatest item is the $16.65 billion settlement with Bank of America over wretchedly-underwritten loans at Countrywide Financial during the height of the housing bubble. I’m hoping to keep this item short, but it’s hard considering how many things are wrong with it.
First, of course, is the question of whether or not these assessments will accomplish anything in terms of changed behavior, which remains to be determined but seems unlikely at the moment. Over the past decade or so we’ve been moving in the direction of fines that, while stunning numerically to most of us, are just seen by the businesses as another cost of the game.
Second is the secrecy with which many of these deals are being hammered out. These are not settlements at trial where the specific misbehavior of miscreant companies is laid out and the disposition of the funds is clearly delineated.
Third is the question of how real the numbers are. In the BoA settlement, some $7 billion is “soft dollars” that the bank will spend on relieving the burdens of individual mortgagors. To start with, many, if not most, of these loans were bundled and sold to investors. If BoA reduces a family’s mortgage balance it’s the investors who are going to be paying the price, although to the extent that BoA is being paid to service those loans their servicing income will likely be slightly reduced going forward. For those loans in which BoA is actually holding the assets, the reduction in principal will reduce income, and thus 35% of those reductions will actually be borne by the Treasury.
Finally, exactly why is BoA being held responsible for Countrywide’s actions taken before they took over? Although the pressure that Hank Paulsen applied to BoA to coerce the takeover of Merrill Lynch in 2009 isn’t as clear here, my recollection is that there was a less overt and less specific pressure from Washington for BoA to take over Countrywide the year before. BoA’s CEO Ken Lewis clearly was acting on his own initiative when the bank bought 17% of Countrywide in 2007, but the complete takeover of Countrywide appeared to be something desired by the government to prevent a financial disaster.
I’m one of the growing number of observers that think a permanent change in corporate behavior requires not fines levied against the companies but prison time for the individuals involved. Even if the natural inclinations of the banks and their boards is to grab every nickle that isn’t red hot or nailed down, if their employees have reason to believe they will be wearing prison jump suits if they cross the line future occurrences will drop.
If I Were King, I would have been delighted to see Countrywide just collapse. I would have been particularly amused if, when the bankruptcy court closed the offices and sold off the assets, the computers were auctioned off for pennies on the dollar to someone who would turn around and wipe the disks and use the systems as the first really big Bitcoin mint. Mortgagors would then see their payments returned “Addressee Unknown” by the post office, and the investors who financed all the paper would discover that there was no way to connect their investments with actual properties. That would have been a fiscal stimulus of the first order! Sure, there would soon have been robo-signers cranking out fraudulent documents to remedy this, as actually happened anyway, but after the first few hundred bankers and lawyers involved were sent up the river that would certainly stop.