B of A settlements defy partisan assumptions on bank accountability

Two settlements concluded Wednesday between Bank of America and state and federal regulators over actions taken during the financial crisis challenge conventional assumptions about Republicans, Democrats and Wall Street.

New York State Attorney General Eric Schneiderman announced a settlement with the nation’s second-largest bank and its former CEO, Ken Lewis, over statements made in 2008 when Bank of America merged with the failing investment bank Merrill Lynch.

In a case initially pursued by former Attorney General and now-Governor Andrew Cuomo, Bank of America was accused of failing to disclose to shareholders the truth about $9 billion in losses at Merrill Lynch before voting to approve the merger. Lewis, in particular, was alleged to have misrepresented the fiscal impact of acquiring Merrill. Following the merger, Bank of America required a federal bailout, in part because of the escalating losses at the entity they had just purchased. Shares plummeted, and investors — who had approved the deal — lost tens of billions of dollars.

Concealment of such information could arguably fit the legal definition of securities fraud, and private investors had already been paid $2.4 billion in damages to settle a separate lawsuit. But Wednesday’s deal with Schneiderman, settling a lawsuit brought under New York’s powerful Martin Act securities law, only recovers a total of $25 million.

Of that sum, Lewis is supposed to personally pay $10 million; however, the bank has already announced they would cover the cost of the penalty through an insurance policy taken out on behalf of their executives. In addition, Lewis will be banned from serving as an officer or director of any public company for three years, although he retired in 2009 and has kept a low profile ever since. Neither Lewis nor Bank of America admitted any wrongdoing as part of the deal.

The $25 million payout to New York State currently equals about two days of Bank of America’s profits. And though Schneiderman claimed in a press release that the settlement “demonstrates a major victory in our continued commitment to applying the law equally to individuals, as well as corporations,” its limited impact on Ken Lewis himself suggests that it’s unlikely to send a very strong message deterring other CEOs from behavior that may fall foul of regulations.

In Washington, meanwhile, the Federal Housing Finance Agency (FHFA), the overseer of bailed-out mortgage giants Fannie Mae and Freddie Mac, announced its own settlement with Bank of America. During the housing bubble, BoA and other banks sold Fannie and Freddie mortgage-backed securities composed of loans that did not meet prescribed underwriting standards. These mortgages quickly failed when the bubble burst, leaving Fannie and Freddie with enormous losses that contributed to their need for a government bailout.

In September 2011, FHFA, under the leadership of Acting Director Ed DeMarco — a Bush-era official who filled a vacancy at the agency and wasn’t replaced until last December —  sued 17 banks, arguing that they had committed fraud by failing to disclose the true nature of the improper loans when selling Fannie and Freddie mortgage-backed securities. Bank of America is the latest in a string of ten banks to settle with FHFA over these allegations.

Unlike the Schneiderman suit, the FHFA settlement recovers a substantial sum — $6.3 billion, around 11% of the face value of the mortgage-backed security purchases. This is in line with the percentages FHFA received in settlements with other banks. While it’s difficult to say whether that figure reflects the full extent of losses on the portion of those securities made up of bad loans, it’s certainly a serious amount of money. Added to another $3 billion Bank of America paid FHFA Wednesday  to repurchase raw mortgages with similar problems, and the total $9.3 billion payout exceeds profits at the bank made in the first three quarters of 2013.

Despite having no prosecutorial authority and being forced to rely on civil suits, FHFA has now recovered $16 billion in legal actions related to mortgage-backed securities. Seven lawsuits are still pending, and if those are settled at roughly the same rates, FHFA will secure as much as $28 billion from banks for securities violations. That would make it the largest penalty banks have had to pay to any government agency for actions that helped create the financial crisis.

Liberal housing advocates had frequently criticized FHFA under DeMarco for not using Fannie and Freddie’s prodigious powers to help the broader housing market by, for example, offering principal reductions for troubled loans. But DeMarco made clear he saw FHFA’s mandate as conserving taxpayer funds and repaying to the Treasury sums equal to Fannie and Freddie’s bailout. While critics called the Republican appointee’s conception unnecessarily narrow, DeMarco appears to have succeeded in that mandate, and in this case, to have inflicted far more pain than his Democratic-appointed counterparts did on banks deemed to have transgressed.

Schneiderman is often hailed by supporters as a champion in the fight to hold banks accountable, but in the Ken Lewis case and others, the impact of his actions on the financial institutions he’s gone after has been considerably less. For example, the National Mortgage Settlement, where Schneiderman and 48 other Attorneys General settled with five major banks over improprieties in the foreclosure process, led to only 83,000 principal reductions despite 1 million having been promised. That settlement also allowed banks to pay their fine through credit for actions they normally perform in their course of business, such as bulldozing homes or making donations to charity.

So, while a Bush-era regulator has exacted a significant price for bank misconduct, a celebrated progressive politician appears to have let them off with little more than a wrist-slap. If there’s a conventional wisdom in politics that Democrats are tougher on banks than Republicans, this week’s BoA settlements appear to upend that.