“Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” declared a government official in a Department of Justice press release announcing last week’s record settlement in which Bank of America agreed to fork over $16.65 billion to settle charges it and companies it had purchased had deceived investors.
Back in Washington from Ferguson, Mo., Attorney General Eric Holder announced at a press conference: “As part of this settlement, Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS [residential mortgage-backed securities] backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors.”
Yet how much from this settlement goes to the investor victims? Nada! In fact, the settlement takes billions from the very investors who were defrauded.
More than $9 billion from this settlement goes to the federal and various state government coffers. And, as Holder proclaimed at the press conference: “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue.”
But whatever Bank of America’s misdeeds – and there were many by the company and those it purchased (Countrywide and Merrill Lynch) – it is certainly not “appropriate” to take from the investors the government itself says were victims to give to homeowners that the government never alleges were defrauded.
Let’s go over the charges of investor fraud, some of which Bank of America admits to. According to Holder: “These loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized. Yet these financial institutions knowingly, routinely, falsely, and fraudulently marked and sold these loans as sound and reliable investments.”
And according to the Securities and Exchange Commission, ordinary shareholders were also deceived. The separate settlement agreement with the SEC states that Bank of America violated laws intended to protect shareholders from fraud by failing to disclose “known uncertainties” in its annual and quarterly reports to shareholders.
Yet who is really footing the actual $16.65 billion bill Bank of America is supposedly paying? Not the Bank of America executives and officials who committed the misdeeds, but the very shareholders and investors in mortgage-backed securities who were victims of the company’s deception. Holder’s DOJ did not require any current or former employee of Bank of America, Countrywide, or Merrill Lynch to pay one red cent.
The bulk of the money will come from the corporate treasury, which belong to all shareholders. Former SEC Commissioner Paul Atkins warned that when corporate penalties are levied to punish shareholder fraud, the company’s shareholders are “penalized twice — once by the fraud and again by the civil penalty.” Indeed, if executives know that it is only going to be shareholders’ money forked over if they commit fraud, what incentive is there to be honest?
And speaking of other people’s money, it turns out that shareholders will not be the only victims of Bank of America’s misdeeds who will be punished twice. The very investors who were sold the fraudulent mortgage-backed securities, including pension funds that serve middle-class retirees – will be forced to take another “haircut.”
The DOJ press release boasts that the settlement’s $7 billion in borrower “relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages.”
Put aside the fact, as mentioned before, that there were no claims in this particular settlement that Bank of America committed fraud against borrowers or homeowners, only investors. Put aside the fact that many homeowners who knowingly borrowed more than they could afford will now be awarded with this “relief.” And put aside the fact that there appears to be no mechanism to prevent borrowers who committed fraud – and there were many, hence the term “liar loans” – from receiving these billions.
No, the biggest outrage is that this much of this “relief” will come not from the coffers of Bank of America, but from the very investors who now hold the fraudulent mortgage-backed securities it sold to them. A DOJ summary of the “consumer relief” states that the company will receive credit toward the settlement for “forgiveness on loans serviced by Bank of America but owned by other investors.”
This is the continuation of an unfortunate trend, begun in the Bush administration, of rewarding and cajoling banks for forgiving loans that are serviced by the bank but owned by other investors. My colleague Hans Bader referred to this as “a bounty on your 401(k).”
And that brings us full-circle to Holder’s two big lies about the settlement: that it serves the interest of “justice,” and that it promotes “the stability of our economy.” Our economy can never function properly if the unjust abrogation of contracts of mortgage investors continues to be encouraged by opportunistic politicos.
As Bill Frey, author of the acclaimed book Way Too Big to Fail and plaintiff in one of first investor lawsuits against Bank of America over mortgage issues, has put it, “Investors from around the world are watching and asking: if they buy U.S. securities, will they need to factor in a risk that they never before anticipated — that the U.S. government will alter the contracts supporting their investments without compensation.”
John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.