A Mortgage Turncoat Who is No Hero

April 26th, 2012
in Op Ed

by Yves Smith, Naked Capitalism

I’m not looking forward to months of pre-election image-burnishing fabrication. The nausea-inducing offering of the day, The Man the Banks Fear Most from the American Prospect, gives us an idea of what we have in store.

heroSMALLThe good news is that this revisionist history on the craven sellout by Eric Schneiderman on the mortgage settlement appears to be in response to a damaging New York Daily News article last week. That story outed the fact that the mortgage task force, the trinket offered to Schneiderman in return for going silent on his stance on the settlement talks, appears to be going nowhere.  (Efforts to rebut this charge served only to establish that the officialdom has totaled the investigations that were underway and are trying to depict them as new activity) Schneiderman had been the leader of the opposition. Getting him on the side of the Administration enabled them to push the deal over the line.

Follow up:

The good news is this shameless propaganda piece is unlikely to do much to change souring opinions of Schneiderman. Matt Stoller pointed out that he is either unknown or disliked in New York.  Today, Politico, which is more influential in DC than American Prospect, ran an op-ed by Tracy Van Slyke on Obama’s Missing Task Force.

But you really need to have a look at the American Prospect piece to see how transparently awful it is. It is clearly based on interviews with Schneiderman and a few of his allies. Much of the piece is told from his perspective and other bits, such as a flattering recap of his career, are pure PR puffery.

This Zero is No Hero

The big lie of the piece, which comes in the opening section, is that trading from the opposition to the settlement to being one of five co-chairmen in a severely understaffed (assuming it is ever staffed) mortgage investigation was a win, as opposed to a sellout. Schneiderman already had, as the article points out, the best litigation weapon in the US, the Martin Act.  I’ve been told by people who know him various reasons for his caving: (1)that he had too little in the way of staff, (2)that he is temperamentally slow (as in too slow) in developing cases, (3)that he was going to have even less in the way of manning thanks to pending budget cuts.  I don’t find them terribly persuasive, since Catherine Cortez Masto of Nevada, in an office far less well staffed than Schneiderman’s, filed two important cases: one a suit against Bank of America for violations of its 2008 consent decree (the filing is devastating) and Lender Processing Services for its role in dubious foreclosure documentation.

The sad thing is that Schneiderman was positioned to make a real difference, and given the easy way out, he took it.

The article presents the notion that Schneiderman was working on a counterproposal, which is consistent with what I was hearing at the time. But the plan as I understood it was that a group of dissident AGs would present their version, with the aim of derailing the Obama settlement and forcing something closer to their version, which included investigations rather than a broad release. The story blandly misrepresents what took place: the administration suborned Schneiderman with a similar-sounding but utterly different in substance task force.

The Obama Cave In

The story also passes off lots of serious misrepresentations. It presents the settlement release as narrow, when this blog and others have debunked that. It tries to claim that the staffing of the mortgage task force is “under way” which is technically accurate (they are trying to hire an executive director, for instance) but substantively misleading. It extols the moribund task force as a son-of-Pecora-Committee level effort, able to produce damages dwarfing that of the settlement, when it has given up its best legal theories in the settlement and statutes of limitations are expiring on the remaining decent ones, securities law claims.

It [the administration] doesn’t need a magical task force to give it permission to file suits, it needs a willingness to cross one of its best meal tickets.

And it actually suggests that the task force might indict “banking” executives. The only people that might get that treatment will be folks at designated liability shields like Lender Processing Services. This Administration could have prosecuted bank officers years ago using Sarbanes Oxley. It doesn’t need a magical task force to give it permission to file suits, it needs a willingness to cross one of its best meal tickets. If you think this might happen, I have a bridge I’d like to sell you.

The Tools are Still in the Tool Box

The article also repeats the Administration’s canard that it couldn’t get the banks to make principal mods. If Team Obama had wanted meaningful principal reduction, they would have used the hundreds of billions of dollars available to them under TARP. Or they could have stared down the four biggest banks, which are far and away the biggest servicers, and told them if they didn’t get figure out how to do deep mods pronto, the regulators would force them to write down their second liens in a major way.

Threatening to demonstrate that mortgage backed securities might not be mortgage backed would have brought the banks to heel quickly, but no one has been willing to go after this issue.

There are additional inaccuracies and misdirections. The story depicts Schneiderman and Biden as the only ones questioning the deal as of June 2011. Simply searching my own archives, I find that Masto and even Lisa Madigan were in opposition. The story also touts Schneiderman’s filing of a suit agains MERS and three major bank immediately after the State of the Union address, but fails to mention that he settled it for a paltry $25 million. And it takes up Schneiderman’s own Big Lie:

Had he just refused to deal and chosen to conduct an investigation by himself, his lack of both staff and jurisdiction would have limited him to a small settlement at best.

That’s nonsense. Schneiderman could have leveraged private attorneys, as Masto did (having them assist on an unpaid basis in return for being able to pursue related civil litigation). And he had a simple to prove nuclear weapon: false certifications by securitization trustees, a theory of action we’ve discussed repeatedly on this blog and one that was presented to Schneiderman. You don’t need big staff to produce big damages. You need a good legal theory that isn’t too hard to prove and has big damages associated with it. Threatening to demonstrate that mortgage backed securities might not be mortgage backed would have brought the banks to heel quickly, but no one has been willing to go after this issue.

While Straw Men and Missed Opportunities Abound

And an astute reader can pick up signs of astonishing Schneiderman naivete. For instance, Schneiderman wanted the IRS in his fantasy task force because he thinks New York and Delaware can collect in a meaningful way on REMIC fraud. Readers of this blog know that the issue of blatant REMIC abuses has already been raised with the IRS, and it is taking the “nothing to see here, move on” position. Any REMIC violations would hit the investors, who have already been woefully abused by the banks. They’d have to sue the original parties to the deal to recover their losses….assuming those parties still exist. A transfer from pension funds investors to pay for yet more bank misdeeds is not likely to be a political winner.

The sad thing is that Schneiderman was positioned to make a real difference, and given the easy way out, he took it. The fact that he had a history of bolder action is irrelevant. The opposition to the mortgage settlement was a last-ditch effort to shore up the rule of law against ongoing assault by the banking oligarchs. And Schneiderman’s capitulation allowed the bad guys to win.

More by Yves Smith

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About the Author

Yves Smith is author of the best seller Econned How unenlightened self interest undermined democracy and corrupted capitalism and founder of Naked Capitalism.

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