Overselling the Bank of America Settlement - The New Yorker
Attorney General Eric Holder announces the Bank of America settlement, August 21st.CreditPhotograph by Alex Wong/Getty
After several days of sober public appearances involving the ongoing protests in , Missouri, Attorney General
allowed himself the briefest of smiles on Thursday morning. He was standing at a lectern at the Justice Department announcing a seventeen-billion-dollar
with Bank of America over its bad mortgage deals in the lead-up to the financial crisis. “This historic resolution—the largest such settlement on record—goes far beyond ‘the cost of doing business,’ “ Holder said. “Under the terms of this settlement, the bank has agreed to pay seven billion dollars 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.” Taking the stage after Holder, Associate Attorney General Tony West used stronger language: “This agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct,” he said. In the mid-aughts, mortgage lenders regularly encouraged people to take on loans that they couldn’t afford to repay. Banks then repackaged these loans into complicated bundles that they resold—in some cases, without the banks disclosing that they knew that these bundles, known as mortgage-backed securities, were not such a great investment. Bank of America and companies that it had acquired were among those that did this. What followed is well-known. People who couldn’t afford to pay their mortgage fell into deeper debt when the housing market collapsed. Unprecedented numbers of them had their homes foreclosed. People called for the government to fix the problem—by changing bankruptcy law, for example, or by forcing banks to lower the principal on loans for underwater homeowners—but the government’s cornerstone program, a loan-modification program called HAMP, has been less effective than people had hoped.
There has been a series of settlements since then with consumer-relief components—among them, a national settlement, in 2012, with five lenders, a JPMorgan Chase settlement last year, and
this year. It’s getting hard to keep track of them. (The Times accompanied an
on their similarities with side-by-side photos of Holder announcing three different settlements and looking more or less identical—same expression, same outfit, same mustache and close-cropped hair.) Critics of the Bank of America settlement were, predictably,
that individual executives weren’t punished, and that the bank’s sins were described only in general terms. That said, the new settlement does have an answer to critics who argue that, in the past, the deals have helped the middle class more than they’ve helped the poor. With this deal, if the bank reduces the balance of mortgages backed by the Federal Housing Administration—which are disproportionately given to low-income borrowers—it gets $1.75 in credit toward its obligation in the settlement for each dollar it forgives. To someone who took out a mortgage from Bank of America in the mid-aughts and then lost it to foreclosure during the real-estate crisis, the consumer-relief aspect of the settlement might seem encouraging. There are, after all, billions of dollars to hand out, and Holder had described it as commensurate with the wrongdoing. Where can a person sign up? This is exactly what worries Lisa Sitkin, a managing attorney at Housing and Economic Rights Advocates, a not-for-profit organization in Oakland that helps clients to fight housing discrimination and abuse. In the 2012 settlement, the five mortgage servicers, including Bank of America, agreed to give about twenty billion dollars in relief to homeowners. Afterward, troubled homeowners, underwater on their mortgages, deluged Sitkin’s office with phone calls. They had heard about this big settlement and wanted to take part. “People would say, ‘I want to apply to this program,’ “ she recalls. The problem was that it wasn’t a program at all—at least not the sort that people were used to, having dealt with government programs in which anyone who applies for a benefit, and qualifies, gets it. In the end, the banks gave relief to more than six hundred thousand people, but, because of the way the requirements were structured, much of the funds went to middle-income people rather than the poor. (The requirements were complicated, so much so that a Web site set up to explain the settlement warned, “Because of the complexity of the mortgage market and this agreement, which will be performed over a three year period, borrowers from the settlement states will not immediately know if they are eligible for relief.”) In addition, the banks had no obligation to fulfill all the requests it received. Many of Sitkin’s would-be clients were left with little, or no, relief. People hurt in the real-estate crisis got their hopes up, only to have them dashed. More worrisome, scammers used the publicity to perpetrate fraud by
vulnerable people—the poor, the elderly—that, for a fee, they could help their clients to reap the benefits of the settlement. In fact, the settlements aren’t even designed to give relief to everyone whose homes lost value when the real-estate market crashed—though, given the rhetoric used by government officials, you would be forgiven for missing that fact. The only thing these settlements are meant to do is to extract a sum from the banks to settle particular claims having to do with specific activities, and then to allocate those funds in a way that is palatable to the banks and appealing to the government and, by extension, to the public. (In the Bank of America deal, the claims being settled have to do with the bank misleading investors, not homeowners. But using some of the funds to help homeowners makes everyone look good.) The problem with this isn’t that banks’ relief efforts don’ it’s that by describing the settlements in grandiose terms, banks and officials risk misleading the public about the scope, which, at best, can confuse people and, at worst, can set them up to fall victim to fraud. Still, starting in a couple of months, Bank of America will start trying to contact people who might be able to benefit from the settlement. “The dollars are not going to remotely cover people’s needs,” Ira Rheingold, the executive director of the nonprofit National Association of Consumer Advocates, told me. And yet the funds have to be spent, so there will be some beneficiaries. “I would tell people who have mortgages with Bank of America, when you get a letter from them in the mail, don’t rip it up like you normally do,” Rheingold said. “You might want to read it.”
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　　HOWEVER November’s presidential election in the United States turns out, one proposal that will likely live on is the introduction of a financial transaction tax (FTT). While by no means a crazy idea, an FTT is hardly the panacea that its hard-left advocates hold it out to be. It is certainly a poor substitute for deeper tax reform aimed at making the system simpler, more transparent, and more progressive.
　　As American society ages and domestic inequality worsens, and assuming that interest rates on the national debt eventually rise, taxes will need to go up, urgently on the wealthy but some day on the middle class. There is no magic wand, and the politically expedient idea of a “Robin Hood” tax on trading is being badly oversold.
　　True, a number of advanced countries already use FTTs of one sort or another. The United Kingdom has had a “stamp tax” on stock sales for centuries, and the US had one from 1914 to 1964. The European Union has a controversial plan on the drawing boards that would tax a much broader array of transactions.
　　The idea of taxing financial transactions dates back to John Maynard Keynes in the 1930s and was taken up by Yale professor and Nobel laureate James Tobin (who, incidentally, was my undergraduate professor) in the 1970s. The idea, in Tobin’s words, was to “throw sand in the wheels” of financial markets to slow them down and make them hew more closely to economic fundamentals.
　　Unfortunately, this rationale has not held up particularly well either in theory or in practice. Particularly misguided is the idea that FTTs would have significantly muted the buildup to the 2008 financial crisis. Centuries of experience with financial crises, including in countries with FTTs, strongly suggests otherwise.
　　What is really needed is better regulation of financial markets. The unwieldy and deeply imperfect 2010 Dodd Frank legislation, with its thousands of pages of provisions,
few serious people view it as a long-term solution. A far better idea is to force financial firms to issue much more equity (stock), as Stanford University’s Anat Admati has proposed.
　　The more banks are forced to evaluate risks based on shareholder losses rather than government bailouts, the safer the system will be. (On this score, Boston University professor Laurence Kotlikoff’s more radical ideas for taking leverage out of the financial system merit serious attention, even if his own quixotic presidential campaign otherwise goes unnoticed).
　　The fundamental problem with FTTs is that th for example, by driving down stock prices, they make raising capital more expensive for firms. In the long run, this lowers labor productivity and wage levels. True, all taxes are distorting, and the government has to raise money somehow. Yet economists view FTTs as particularly troublesome because they distort intermediate activity, which amplifies their effects. A modest tax that is narrowly targeted, like the UK’s, does not see but the revenue is modest.
　　The US desperately needs comprehensive tax reform, ideally a progressive tax on consumption. In any case, a properly designed FTT can be no more than a small part of a much larger strategy, whether for reforming the tax system or for regulating financial markets.
　　Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University. Copyright: Project Syndicate, 2016.www.project-syndicate.org
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