The Bank of America mortgage-settlement-industrial complex generated another settlement today. This one is the biggest so far, but it is also the most recent so far, and the word "record" gets used a lot in Bank of America settlement announcements. If there's a $30 billion Bank of America mortgage settlement in November, my mind will remain un-blown.
Here are the Bank of America mortgage-related penalties that I am aware of:
Some of those bars aren't visible to the naked eye but trust me, they're there. The smallest is the $20 million 2011 settlement with the Justice Department for the 160 times that Countrywide "wrongfully foreclosed upon active duty servicemembers without first obtaining court orders." (Bank of America acquired Countrywide in June 2008, to the former's eternal regret.) The biggest -- so far! -- is today's $16.65 billion settlement for a grab-bag of assorted mortgage misdeeds. The total -- again, not a comprehensive total of Bank of America's mortgage costs, just the results of a casual review of mortgage-related settlements that were publicly announced -- is about $68 billion.1 So far.
That chart doesn't convey the goofiness of all of this. Perhaps this one will:2
What have we learned? Good lord, nothing, right? The first settlement on the chronological chart is a 2010 class action settlement with Countrywide shareholders: People who bought Countrywide shares between March 2004 and March 2008 sued Countrywide for not informing them that its underwriting was rotten and would ultimately bring down the company. Today's pile of settlements includes this $20 million settlement with the Securities and Exchange Commission for not informing shareholders that Countrywide's and BofA's pre-crisis underwriting was rotten and would ultimately incur huge costs. If you squint, they're the same settlement, four years and $580 million apart.
While you're squinting, take a look at that complex of Fannie Mae and Freddie Mac cases at the top of the chart. In its heyday, Countrywide sold some bad mortgages to Fannie and Freddie. This led to disputes, litigation, anger. In 2011, Bank of America settled those disputes with Freddie, and partially settled with Fannie, for a total of about $2.8 billion. In 2013, it settled again with Fannie, this time for a bit over $10 billion. In March 2014, it settled with the Federal Housing Finance Agency, Freddie and Fannie's regulator, for about $9.3 billion.3 In July 2014, it was ordered to pay $1.27 billion to the Department of Justice over a subset of those loans originated pursuant to the unfortunately named, and also just unfortunate, "Hustle" program. And today's Statement of Facts has a section that begins:
From at least 2004 through 2008, Countrywide Home Loans, Inc. and Countrywide Bank, FSB (collectively, "Countrywide”) originated residential mortgage loans and sold certain of those loans to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively, “government-sponsored enterprises” or “GSEs”).
And then launches into how bad those mortgages were. Countrywide sold bad mortgages to Fannie and Freddie from at least 2004 until 2008. This is now the fifth time it's been ordered to pay over a billion dollars in penalties because of the bad job it did with those mortgages.4 Maybe it's the last! Who knows. But it's the fifth.5
A popular criticism of the modern approach to punishing bank misdeeds -- giant fines imposed on the banks, not much in the way of individual punishments and a preference for settlements rather than trials -- is that it turns the fines into just a "cost of doing business," normalizing misbehavior rather than preventing future wrongdoing. You can tell that this criticism is right because Attorney General Eric Holder protested way too much today:
I want to be very clear: the size and scope of this multibillion-dollar agreement go far beyond the “cost of doing business.” This outcome does not preclude any criminal charges against the bank or its employees. Nor was it inevitable, over these last few weeks, that this case would be resolved out of court.
I love that last part: Sure, people criticize the Department of Justice for settling too many cases. And sure, the DOJ settled this case anyway. But it could have not settled this case. Doesn't that count for something?
I have mixed feelings about this line of criticism,6 but never mind that now. Whatever you think about fines versus prison, or trials versus settlements, or corporate versus individual responsibility: Just look at all those settlements! Every mortgage misdeed that Bank of America (or Countrywide) committed has come back to haunt it two, five, eight times. And every mortgage misdeed that Bank of America committed has a parallel in the settlements of JPMorgan, and Citi, and pretty much every other bank, all of which read more or less the same. The mortgage settlement business has a life -- an immortality? -- of its own.
Isn't that bad? The constant drumbeat of settlements really does normalize misbehavior: If every bank is constantly settling charges of mis-selling mortgages, then mis-selling mortgages can't really be that bad, can it? If every bank is constantly paying billions of dollars in fines, then paying billions of dollars in fines becomes less shameful. And if every bank is fined over and over again for the same conduct, then the attitudes of the bankers will shift. It is no longer, "Ooh, we were bad, sorry." It becomes, "Oh, come on, this again?" The shame is gone, replaced by resentment. And shame is much more useful than resentment for preventing misconduct. If fining banks is just business as usual for regulators, then paying those fines will be business as usual for banks.
Many caveats here, including that I use "settlements" loosely to include the results of one (entertaining) jury trial. For the most part I have ignored ordinary-course putback and similar claims that are disclosed in Bank of America's filings without separate announcement; these are just individually publicized settlements, and just the ones I found. Bloomberg News counts "more than $70 billion" in payments. Good earlier settlement timelines, which have informed this chart, include this from Bloomberg News and this from the Wall Street Journal.
2 Obviously this is not easy to follow, and you should not take as science for instance the allocation among entities or exactly how the arrows flow. Also: Never build a flowchart in Excel, feh.
3 Or something, maybe $9.5 billion, or $6.3 billion, depending how you count the repurchases. The chart takes the aggressive number. Also I should say, this case is about Bank of America and Merrill as well as Countrywide and, unlike the other cases in that paragraph, this one is about the sale of private label mortgage-backed securities, not the sale of loans directly to Fannie and Freddie.
4 And that's not even counting those shareholder lawsuits about how it failed to disclose to shareholders the problems with the mortgages that it was selling to Fannie.
5 Similarly, from today's announcement:
The settlement includes a statement of facts, in which the bank has acknowledged that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans. When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses.
But this is something like the eighth such settlement! Bank of America settled (twice!) with a big bondholder group, and then settled separately with another bondholder class, and reached separate settlements with bond-insurer types like Assured Guaranty, MBIA, FGIC and AIG. Did anyone on earth not know that Bank of America sold bad residential mortgage-backed securities to investors with insufficient disclosure?
6 I tend to agree, for instance, that fining the public shareholders of a corporation is a pretty diffuse way to deter misbehavior by individual agents of that corporation, and that throwing those agents in jail would at least be more direct. On the other hand, I don't want anyone to be put in jail without a very good reason, and the widespread belief that there's plentiful evidence of criminal conduct by high-level bankers seems to me to be mostly a fantasy. Today's Statement of Facts, though bland and negotiated and biased, paints a pretty clear picture: The misbehavior at Countrywide and Bank of America and Merrill Lynch was an emergent property of those institutions and the market in which they operated, not the conscious criminal decision of a few high-level executives. (Except maybe one!) There are no twisted villains cackling maniacally at the thought of the bondholders they'd deceive. It's all people saying, "Well, if our competition prices it, we should price it too," and then not looking too hard at the warning signs they didn't want to see.
Similarly, I take the point that public trials will probably disclose more information about misconduct than will settlements with Statements of Fact as bland as today's (or JPMorgan's). But I don't think that rolling the dice on multibillion-dollar cases with a randomly selected pool of laymen is a good idea either for prosecutors or for banks. And if your goal is to shape financial industry behavior, then jury trials don't seem to help much with that: Random chance is not the way to do complex regulation.
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