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business daily July 26, 2012
Opinion Bungled bank bailout leaves behind righteous anger (Part I) Neil M. Barofsky
Former special inspector for the Troubled Asset Relief Program and senior fellow at New York University’s School of Law
incentive check for US$40,000, it will still be able to claim US$60,000 in credit toward meeting its obligations under the settlement.
Taxpayer pays
I
n the year since I stepped down as the special inspector general of the Troubled Asset Relief Program, the sadly predictable consequences of the government’s disparate treatment of Wall Street and Main Street have only become worse. As the banks amass size and power, Main Street continues to get pummelled. Part of the current economic malaise can be traced directly to Treasury’s betrayal of its promise to use TARP to “preserve homeownership.” The Home Affordable Modification Program has brought little meaningful improvement, with fewer than 800,000 ongoing permanent modifications as of March 31, 2012, a number that is growing at the glacial pace of just 12,000 per month. In June 2011, Treasury appeared to take a tentative step toward holding the mortgage servicers accountable for the widespread misconduct in the programme by pledging to withhold the incentive payments to three of the largest banks – Wells Fargo Co., Bank of America Corp and JP Morgan Chase & Co – until they came into compliance with HAMP’s rules.
Released payments Treasury couldn’t even keep this modest commitment. Although Wells Fargo had improved its performance and was awarded all of its withheld incentive payments, JPMorgan Chase and Bank of America continued to fail to meet the baseline standard. Nonetheless, in March 2012, as part of a broader settlement of the so-
called robo-signing scandal, Treasury to charity, and agreeing not to released all of the withheld payments, pursue deficiency judgments against totalling more than US$170 million. homeowners, whereby banks seek As a result, the government hasn’t to force a homeowner to pay the held any servicer responsible for difference between the balance of the widespread abuses of HAMP the loan at the time of foreclosure applicants, nor is it ever likely to do so. and what is recovered by the bank In return for what was touted as from a foreclosure sale. This sounds a US$25 billion payout, the banks good, but it should be noted that received broad immunity from these are all part of the normal future civil cases arising out of their course of business for the banks. widespread use of forged, fraudulent The remaining US$10 billion in credits or completely fabricated documents to are supposed to be scraped together through principal reductions on foreclose on homeowners. The headline number sounds “underwater” mortgages, but that doesn’t mean impressive, yet that the banks the banks only themselves had to cough up will be taking US$1.5 billion to US$10 billion provide a paltry It is clear that in losses. The US$2,000 to settlement each borrower the criminal-justice grants them wrongfully partial credit foreclosed upon, system has proved illfor reducing a few billion equipped to address the principal dollars more in on loans that penalties to the they service states, and a few the financial crisis. For but don’t own, billion to provide that, we needed effective such as those for borrower contained in refinancing. regulatory reform mortgageThe remaining b a c k e d US$17 billion, securities. however, won’t Worse still, involve payouts of they can earn money, but will be met in the form of the banks receiving additional “credits” toward the “credits” for certain activities. This settlement through taxpayer-funded includes US$7 billion that will be HAMP modifications. For example, “earned” for routine tasks related to if a servicer reduces US$100,000 the housing crisis, such as bulldozing in principal for a mortgage through worthless houses, donating homes HAMP and receives a taxpayer
As a result, the settlement will actually involve money flowing, once again, from taxpayers to the banks. Another announcement that accompanied the settlement, made by President Barack Obama during his State of the Union address, was the creation of a working group under the Justice Department’s Financial Fraud Enforcement Task Force to investigate toxic mortgage practices. This arose out of the political fallout from the government’s failure to bring any significant criminal cases related to the financial crisis. With the statute of limitations fast approaching for much of the conduct underlying the crisis, it seems increasingly unlikely that any criminal cases will be brought. It is fair to ask why more haven’t been pursued. The president, Attorney General Eric Holder, and Treasury Secretary Timothy Geithner have all answered this question by suggesting that it was greed and bad judgment, not criminal conduct, that contributed to the crisis, and a number of high-profile investigations have been closed. The answer more likely lies with the Justice Department’s lack of sophistication and the timidity that set in after it lost a high-profile case against two Bear Stearns Cos. hedgefund executives in 2009. In any event, it seems unlikely that an 11th-hour task force will result in a proliferation of handcuffs on culpable bankers. It is clear that the criminal-justice system has proved ill-equipped to address the financial crisis. For that, we needed effective regulatory reform. Instead, we got the 2010Dodd-Frank Wall Street Reform and Consumer Protection Act. My fear about the inadequacy of Dodd-Frank has only gotten worse over the past year. The top banks are 23 percent larger than they were before the crisis. They now hold more than US$8.5 trillion in assets, the equivalent of 56 percent of gross domestic product, up from 43 percent just five years ago. The risk in our banking system is remarkably concentrated in these banks, which now control 52 percent of all industry assets, up from 17 percent four decades ago. There is broad recognition that Dodd-Frank hasn’t solved the problem it was meant to address – the power and influence of banks deemed too big to fail. Bloomberg View
(For editorial reasons, this article is published in two parts. The second part will be published in tomorrow’s edition.)
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