A Few Billion Here, A Half A Billion There. . .

I can’t remember if I’ve ever mentioned on this blog how much I like Matt Taibbi’s work. He’s an excellent investigator and even better writer–it would almost be worth getting a subscription to Rolling Stone just to read his column. Today’s is about the Attorneys General settlement with the big banks and how it’s falling apart. . . which is a good thing (full disclosure: I shamelessly stole the idea for this post from jnc4p, who posted the link over on The Plum Line).

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!

We Are So Screwed

There were already lots of economic discussions today but I couldn’t resist this over-view for non-economists. I found a conservative economist I mostly agree with but don’t panic, it hardly ever happens.

This is seriously an interesting and informative piece from a conservative economist who helped develop Reaganomics. Of course he has since tried to re-formulate the plan and was also a huge critic of Bush, the Iraq War and Bush’s economic policies. I’m pretty sure I’ve quoted him before and gotten an onslaught of criticism for doing so from conservatives, but I’m just going to go ahead and do it again. I understand that he is no longer a revered voice in conservative circles and that some of his criticism of Bush was beyond the pale, but this is still a good read and gives an historical reference that some of us non-economists crave in order to understand the larger view of the mess that 2008 has wrought on the world. BTW, he is a critic of both Republican and Democratic economic policies and seems to place a high value on a thriving middle class, me too. I may be missing some essential economic reality or other so feel free to point it out, but most of what he says sounds about right to me. I placed just a few quotes below so read the entire piece if you’re interested. I’ve been accused, lightheartedly, of linking to rather esoteric economic journalism, so I imagine this is another one in that vein. I can’t seem to help myself.

Paul Craig Roberts (born April 3, 1939) is an American economist and a columnist for Creators Syndicate. He served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics.”[1] He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service. Roberts has been a critic of both Democratic and Republican administrations.

More of his bio from Wikipedia

Quotes from a piece in CounterPunch today:

Economic policy in the United States and Europe has failed, and people are suffering.

Economic policy failed for three reasons: (1) policymakers focused on enabling offshoring corporations to move middle class jobs, and the consumer demand, tax base, GDP, and careers associated with the jobs, to foreign countries, such as China and India, where labor is inexpensive; (2) policymakers permitted financial deregulation that unleashed fraud and debt leverage on a scale previously unimaginable; (3) policymakers responded to the resulting financial crisis by imposing austerity on the population and running the printing press in order to bail out banks and prevent any losses to the banks regardless of the cost to national economies and innocent parties.

To deal with the adverse impact on the economy from the loss of jobs and consumer demand from offshoring, Federal Reserve chairman Alan Greenspan lowered interest rates in order to create a real estate boom. Lower interest rates pushed up real estate prices. People refinanced their houses and spent the equity. Construction, furniture and appliance sales boomed. But unlike previous expansions based on rising real income, this one was based on an increase in consumer indebtedness.

There is a limit to how much debt can increase in relation to income, and when this limit was reached, the bubble popped.

The Paulson Bailout (TARP) was large but insignificant compared to the $16.1 trillion (a sum larger than US GDP or national debt) that the Federal Reserve lent to private financial institutions in the US and Europe.

In making these loans, the Federal Reserve violated its own rules. At this point, capitalism ceased to function. The financial institutions were “too big to fail,” and thus taxpayer subsidies took the place of bankruptcy and reorganization. In a word, the US financial system was socialized as the losses of the American financial institutions were transferred to taxpayers.

He goes on to talk about Greece, the IMF and our very own Fed and QE3 and then concludes with this:

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability. As Gerald Celente says, “when people have have nothing left to lose, they lose it.”

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