Tuesday, September 6, 2011


Tuesday, September 6, 2011

50 State Attorney General Effort to Sell Out to Banks Makes Even More Egregious Offer

The so-called 50 state attorney general mortgage settlement negotiations (a bit of a misnomer, since at least 4 attorneys general appear to be out, and various Federal banking regulators are alos party to the deal) are looking more and more like a desperate effort to reach any kind of a deal so as to save the officialdom’s face. The only good news is the banks are so insistent on total victory that despite the efforts to pretend the talks are making progress, the odds of a deal being consummated still look remote.
It is nevertheless frustrating to continue to see the media depict the flailing about by the attorneys general headed by Tom Miller as progress. I’ve been involved in negotiations for much of my career, and I’ve never seen so much incompetence on open display. The Financial Times headline, “US banks offered deal over lawsuit” is substantively misleading. You can’t credibly put forward a proposal unless your side has signed off on it. Yet he has just made an offer that his own side may not support. And this isn’t the first time Miller has pulled this trick.
Per the Financial Times:
According to five people with direct knowledge of the discussions, state prosecutors have proposed settlement language in the “robosigning” case that also might release the companies from legal liability for wrongful securitisation practices.
Some state officials have expressed concern that they have offered the banks far too broad a release from liability. Others say the broad language was perhaps inadvertently crafted and will be tightened as negotiations continue. Participants on both sides stressed the talks remain fluid.
This text suggests reservations well beyond those expressed by the attorneys general known to be likely to refuse to sign onto the “50″ AG effort: Nevada, New York, Delaware, and Massachusetts. All have expressed reservations about an overly broad release, which is the first concern mentioned. That means these four, and perhaps additional attorneys general, fall into this group. But note that the article says that others think the release was drafted ineptly, which suggests they were not opposed to a release covering issues beyond robosigning if it was well crafted. That further suggests, as we have inferred from other news stories on the progress of the talks, that Miller at a minimum is doing a poor job of representing his side and is keeping them at a remove. Or it may point, as we suspect, to the fact that he now has his manhood at stake in getting an agreement inked. That means he is effectively working on behalf of the banks against his fellow attorneys general, since his side looks to be more malleable than the banks (the assumption probably is that the AGs will yield to the banks’ position to reap several hundred million dollars in blood money for their budget starved states).
What is also astonishing is the notion expressed in the extract above, that some of the AGs seem to think that the release language may get tougher. Huh? If it has been presented to the banks, as the headline of the article suggests, that would be a major retrade, and would be treated as operating in bad faith by the other side. That hope is simply bizarre, and I wonder if Miller tried to sell it to some unhappy AGs to minimize dissent.
The article later gives more of the substance of the proposed release, and it isn’t hard to see why some attorneys general have reservations:
The worry over the states’ counterproposal stems from its treatment of loan documents. The term sheet proposes to release the banks from legal liability over how mortgage documents were maintained, prepared and transferred, people familiar with the matter said.
Though the counteroffer attempts to release the banks from liability with respect to home repossessions, and explicitly states that the release does not include securitisation claims, the language is broad enough in that it could prevent state officials from bringing securitisation claims in the future should they sign up to the agreement.
At the heart of securitisation claims, which involve missteps in how home mortgages were bundled into bonds, are allegations that the banks did not properly maintain and transfer documents from one step in the complicated chain to the next.
The securities law issue is a headfake; the statute of limitations has passed for securities litigation on these deals, save for ongoing representations made in periodic filings (which is a real issue for the servicers and trustees, and note that the major trustees, such as Bank of New York, Deutsche Banks, and US Bank, are not party to these talks and hence would not be covered).
While it is hard to know from this remove exactly what is contemplated, this to release the banks from liability for chain of title issues has the potential to blow up in the AGs’ faces in states hard hit by the housing meltdown, since this issue will stay in the public eye as borrowers continue to use chain of title arguments to forestall foreclosures.
But even with Miller doing his damnedest to drag his colleagues towards the banks’ position, the banks are continuing to play non-negotiable:
However, the banks – some of whose share prices have been battered by concern about their exposure to mortgage-related litigation – are pressing for immunity from a raft of alleged civil violations and have called the latest proposal a “non-starter”.
They say the proposals from state prosecutors will need to be expanded before striking a deal, which is expected to involve a total penalty of $10bn to $25bn.
The two sides will meet again this week to iron out their differences. They are close to an agreement on future standards governing the servicing of home loans, yet remain far apart on other issues, such as legal liability claims, compliance and enforcement, and the amount of cash it will take to settle the allegations.
It looks as if Miller has become committed to getting a sizeable settlement and therefore is trying to back into a juicy enough release to get the banks to sign off on a big enough number. And his and the Feds assumption with the AGs is that they will cave if they are offered the chance to bring hundreds of millions in settlement dollars to cash-strapped states.
But from the banks’ perspective, any release by AGs and Federal regulators will not stand in the way of private lawsuits. Nevada, New York, and Delaware are pressing ahead with their investigations into those issues. Any resulting lawsuits will help stoke private litigation. So the defections by a small group of tough-minded AGs makes a settlement by the rest vastly less valuable.
Lordie, this is deja vu all over again. As we said in July:
The latest update is comical, if you read between the lines. The deal is cash for a release. Everything else is decoration. And both sides of that deal are falling apart. The banks are squabbling among themselves as to who has to pony up what, with everyone except maybe BofA posturing that they really don’t owe that much. Oh, and the other side of the equation, the release? The banks and the AGs are not on the same page.
But if you read the Wall Street Journal article on the state of play on talks, you might well be fooled by the upbeat tone and the emphasis on the agreement on the stuff that does not matter (we and others went through the original AG term sheet, and it was pathetic, since virtually all of it was nice sounding exhortations which merely having the banks agree to comply with existing law!). For instance:
All sides have agreed to a framework that would govern how banks meet their obligations once a deal is reached. Those include principal reductions on certain mortgages, forgiveness of second-lien loans, restitution to borrowers and dealing with foreclosure-related blight. A person close to one of the banks said remaining differences are narrowing.
Earth to base, “remaining differences” are irrelevant if the biggest items aren’t close to resolution.
I wish someone would put this effort out of its misery. But as long as the media keeps treating the Miller/Federal regulator PR as serious, yours truly will have to keep debunking it
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