Why the bank-settlement talks are likely to drag on indefinitely

August 22, 2011
NYT and the WSJ on the status of the bank foreclosure-settlement talks.

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Today brings dueling stories in the NYT and the WSJ on the status of the bank foreclosure-settlement talks. At issue is the question of whether the banks should be given immunity with respect to lawsuits surrounding their securitization shenanigans. Here’s the WSJ, saying quite clearly that they won’t:

U.S. and state officials dismissed the push for broad immunity as a “nonstarter,” according to a federal official involved in the talks, but they have countered with a narrower offer. It would cover robo-signing and other servicer-related conduct but leave banks open to potential legal action for wrongdoing in fair lending and securitization, according to people familiar with the situation. Attorneys general in California, Delaware, Massachusetts and New York have said they are investigating mortgage-securitization practices.

In the NYT, by contrast, Gretchen Morgenson says that New York’s Eric Schneiderman is pushing back against a federal attempt to give banks immunity on such matters:

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

So, is immunity with respect to mortgage securitization a nonstarter, or is it the whole reason why banks would dream of signing the settlement in the first place? I suspect it might be both. If I was a bank, I wouldn’t dream of paying billions of dollars in return for a narrow settlement precluding further prosecution about robo-signing and the like: it just wouldn’t make economic sense to do so. At the same time, if I were Schneiderman, in the middle of a detailed investigation into what banks’ mortgage departments got up to in the run-up to the crisis, I certainly wouldn’t want that investigation rendered moot and toothless before it had even been concluded.

If you’re expecting this settlement to be announced any time soon, then, prepare for disappointment: these are the kind of talks which often fall apart at the final hurdle. The Justice Department is on the record as wanting to “bring billions of dollars of relief to struggling homeowners”, but it’s not obvious that this settlement is the best way to do that, or even that any kind of mechanism for delivering that relief is credibly in place. So my expectation is that the talks are going to drag on, yet another contingent liability hanging over the head of America’s largest banks. It’s an outcome that no one really wants, which weirdly makes it the kind of outcome most likely to happen.


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