All Things in Moderation

If it does get done, expect a great deal of public debate over whether or not the size of the settlement was sufficient. Did the banks pay enough? Should they have paid ten billion more? Twenty? Even I engaged in a little bit of that some weeks ago.

But if and when that debate takes place, it will actually obscure the real issue, because this settlement is not about getting money from the banks. The deal being contemplated is actually the opposite: a giant bailout.

In fact, any federal foreclosure settlement along the lines of what’s been proposed will amount to a last round of post-2008-crisis bailouts. I talked to one foreclosure activist over the weekend who put it this way: “[The AG settlement] will be a bigger bailout than TARP.”

How? The math actually makes a hell of a lot of sense, when you look at it closely.

I know that Mark and quarterback have both written about their experiences with settlements like these, and how you often are recovering mere pennies on the dollar, but I hadn’t thought about the implications of that until I read this:

[A] private analyst this summer was estimating that just one bank, Bank of America, could face more in damages than the Obama administration and the AGs are now trying to “wrest” from all the major banks, combined, for all their liabilities.

Just a few days ago, news of more such suits came in. An Irish company called Sealink Funding is suing Chase and Bank of America, seeking $4.5 billion combined in connection to losses in mortgage-backed securities sold to them by those banks. Meanwhile, a German bank, Landesbank Baden-Wurttemberg, is suing Chase for an additional $500 million in losses.

These huge amounts – a few billion here, a half a billion there – are coming from single companies, directed at single banks. And think about the Bank of America settlement for $8.5 billion: what’s the usual payoff in a lawsuit settlement? Ten cents on the dollar? Five?

In fact, the settlement amount in that case was just 2% of the face value of the loans when they were securitized ($424 billion), and represented just 4% of the principal still outstanding ($221 billion).

Why do those figures matter? Because the way these securitizations were structured, legally, Bank of America is obligated to buy back any loans that were sold fraudulently at face value – that is part of the legal language in the “pooling and servicing agreements” under which all of these mortgages were pooled.

So minus a settlement, Bank of America – one bank — had a potential liability of $424 billion just from its Countrywide holdings! And it got off for $8.5 billion, a major victory.

All of which puts in perspective the preposterously small size of the proposed AG settlement. $20 billion would be a lousy number if we were just talking about Bank of America. But all the big banks combined?

And an aspect of the whole Wall Street fiasco that hadn’t even occurred to me was who bought some of those derivatives (is that the right term, Scott?) CDOs (Michi):

To recap the crime: the banks lent money to firms like Countrywide, who in turn created billions in dicey loans, who then sold them back to the banks, who chopped them up and sold them to, among other things, your state’s worker retirement funds.

So this is bankers from Deutsche and Goldman and Bank of America essentially stealing the retirement nest eggs of firemen, teachers, cops, and other actors, as well as the investment monies of foreigners and hedge fund managers. To repeat: this was Wall Street hotshots stealing money from old ladies.

So now that California’s Attorney General has joined New York’s in deciding to not participate in this settlement, we may see some of these big banks, well, fail. Matt’s conclusion is that if they truly had to come to an equitable settlement it would cost them (in aggregate) a trillion dollars or more. That’s mindboggling!