The mortgage investigations drag on

By Felix Salmon
January 25, 2012
settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it's not going to happen any time soon.

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The shape of a possible settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it’s not going to happen any time soon. And without a deal in hand, Barack Obama ended up making a different announcement in his State of the Union address:

Tonight, I’m asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

Sam Stein has the details — but suffice to say that this is a new investigation, with no fewer than five co-chairs, which will run in parallel to the existing DoJ investigation:

The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president’s Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ.

To recap: we were meant to have a settlement by now. And instead of a settlement, we’ve got yet another investigation, where the aggressive New York attorney general looks as though he’s in the minority with respect to punishing the banks for their misdeeds.

The settlement as it looks right now has a reasonably large headline figure attached — $25 billion — but most of that is principal reductions which would make a lot of sense for the banks even if there were no settlement at all. In fact, there’s a case to be made that the settlement talks have delayed much-needed principal reductions. If you’re a bank in settlement talks and you want to do across-the-board principal reductions while removing yourself from legal jeopardy, of course you try to connect the former to the latter. After all, principal reductions plus immunity from prosecution looks much more attractive than principal reductions on their own. And the government can’t announce a big settlement figure if the banks have already reduced the principal on a lot of mortgages anyway.

But frankly any settlement now looks just as far away as ever. After all, there’s no point in setting up a new investigation to hold banks accountable, if we’re about to see a settlement which prevents any law-enforcement body from doing that.

So expect the status quo to continue, probably through 2012: banks with huge contingent legal liabilities hanging over their heads and their stock prices, and the government holding back on prosecutions as it attempts to cobble together a global settlement. It’s a recipe for uncertainty and gridlock and banks hoarding their money rather than lending it out. New investigations are all well and good, but I can’t help but think that it’s a bit late to be launching them in 2012. This should clearly have been done in 2008, or 2009 at the latest.

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