Thursday, January 5, 2017

A missed opportunity

This is my fourth and final post in response to David Dayen's Chain of title. If you have any interest in the foreclosure crisis of the previous decade, I recommend it highly.

My first post provided a primer on the process of mortgage securitization, setting up the aspects of the process which led to the "need" for banks to fabricate documentation in order to foreclose on homes that they didn't necessarily own.

The next post provided a representative catalog of varieties of fraud perpetrated by the financial sector in the course of the foreclosure crisis.

The third installment provided a framework for thinking about the rights and wrongs of the situation.

This post is about the political failure in the face of the crisis. The failure was bipartisan, with some evidence that Republicans were more willing (eager?) to let the banks get away with theft. But I want to highlight the aspect of this being a missed opportunity for Democrats. Both parties failed the public. The Democrats failed themselves, and thereby contributed to the election of Trump.

I know of three basic arguments for why the Obama administration didn't act to bring some accountability to bear on banks and their mortgage-servicing appendages.

The most respectable defense I've heard for the government's inaction is that there simply wasn't enough evidence of criminal misdeeds for a case to be brought. While the banks' actions may have been morally objectionable, that's not enough to throw someone in jail.

I suppose it's possible that this defense is true. What it fails to explain, however, is why prosecution wasn't taken seriously at a lower level. Dayen relates copious evidence accumulated by the subjects of his book: documents and actions that were prima facie evidence of fraud.

Knowing that fraud happened doesn't establish who did it. But it seems pretty obvious to an outsider, that if you know there was fraud, you investigate, and you bring to trial anyone you think you can prove committed the fraud.

If the defendant was just a low-level functionary carrying out the orders of some more important perpetrator, then hopefully the low-level functionary will "sing," and you'll be able to work your way up the chain. Perhaps eventually you will have evidence to make a decent case against, say, the head of a bank, or some other senior decision-maker.

But if you don't even start with the people whose names are staring you in the face on the fraudulent documents, if you don't pull on that chain, you have no way of accumulating the evidence against the higher-ups.

The Obama administration - leading Democrats in general - apparently decided not to pull on the chain:
Banks had been caught red-handed submitting false documents to courts, with millions of documented examples, and law enforcement treated it like a man catching a too-puny fish and throwing it back. No one bothered to investigate the misconduct, instead charging banks $2,000 for every family they threw into chaos and leaving it at that. That evidence would be unusable in future cases; Nevada couldn't go up the food chain from LPS and nail servicers for fraudulent documents. Ongoing foreclosure fraud using previously submitted forgeries and fabrications would be effectively legalized, or at least beyond the reach of state and federal prosecutors. Sure, officials swore that they still reserved the right to pursue criminal charges, but the reaction to that varied between chuckles and hysterical laughter. (p. 280, emphasis added)
Another potentially respectable defense is that Obama's team held back from going after banks out of fear of how the economy would be hurt by such action. "Treasury Secretary Tim Geithner reportedly saw HAMP not as a relief vehicle but as a way to 'foam the runway' for the banks, allowing them to absorb inevitable foreclosures more slowly." (p. 67)

I don't think that's a great call on policy grounds. If your economy's health depends on banks being able to defraud people out of their houses, you really need to do something about that. Even if it wouldn't have been prudent to come down on the banks like a ton of bricks right at the time, you needed to figure out a course of action to bring the illegal practices to a halt and eventually figure out who the guilty parties were. To do less was to allow massive moral hazard into the system, in favor of the banks (see the last part of the previous post).

The third explanation is that Obama was simply protecting the interests of major campaign donors.
The Obama economic team also resisted a policy called cramdown, which would have allowed bankruptcy judges to modify terms on primary residence mortgages, as they can other debt contracts. Liberal lawmakers believed this threat of bankruptcy modifications would give homeowners needed leverage to negotiate relief. But although then-Senator Obama endorsed cramdown on the 2008 campaign trail - banks even held meetings to prepare for its eventuality - his administration pressured congressional leaders against including it in must-pass bills like the economic stimulus. When it cam up as a stand-alone bill, a dozen Senate Democrats sided with the industry and against cramdown, and senator Dick Durbin, the bill's sponsor, remarked about Congress that the banks "frankly own the place." But they appeared to own the White House too. Liberal lobby groups complained that they would meet with senators on cramdown, and then Treasury Department bigwigs would come in afterward and lobby against it. Concern for fragile bank balance sheets outweighed concern for homeowners. (p. 67)
As more evidence accumulated pointing to the scope and importance of foreclosure fraud, the attorneys general of all 50 states started to work toward a joint investigation. But that effort pretty quickly got derailed by the willingness of some of the AG's to cut the banks an easy break.

Iowa's AG Tom Miller - who had received hefty campaign contributions from bank lawyers - initially promised, "we will put people in jail." But later he backtracked and "described the fifty-state investigation as 'inherently civil'". (p. 239-240) In other words, not the sort of thing for which anyone would end up doing any jail time.

In general, Miller and other AG's moved quickly to discussion of a global settlement with the banks, which would allow the banks to put the issue behind them with the payment of some money - a relatively small amount, given the scope of the crime they may have committed and the resulting harm. But it was a questionable strategy to talk about a settlement without first investigating what the banks may have done. If you haven't assembled evidence about the scope and nature of the alleged crime, you have little leverage for driving a useful bargain.

New York's AG, Eric Schneiderman, continued to press for a robust investigation, which could even touch on the validity of mortgage-backed securities transfers.
In response, Tom Miller booted Schneiderman off the fifty-state executive committee, saying he "actively worked to undermine" settlement efforts. The White House pressured him to support the deal he was just barred from negotiating. Kathryn Wylde, chief executive for the business-friendly Partnership for New York City, even accosted Schneiderman at the funeral for former New York governor Hugh Carey, urging him to back off the banks because "Wall Street is our Main Street." Housing and Urban Development secretary Shaun Donovan, who spent months hosting tea-and-cookies settlement talks with banks in his conference room, didn't deny the effort to rein in Schneiderman, telling the New York Times that everyone would benefit from a speedy resolution. But the fifty-state probe had launched a year earlier; all this time pent crafting deals could instead have been spent on investigating. (p. 266)
So this is an Obama problem - it's his Justice Department that made a point of not working up the chain to find out who was driving the problem, it's his administration that pressured Schneiderman to support a bad deal, and so on.

But it's a broader Democratic problem as well: Iowa AG Tom Miller, one of the early AG's to back off from prosecution and favor a slap on the wrist instead, is a Democrat.
Eric Schneiderman [a Democrat] filed a last-minute suit against MERS and three banks, but quickly settled the case for $25 million. After years of litigation, Massachusetts's Martha Coakley [a Democrat] got only $2.7 million from banks who foreclosed on homeowners without standing. Illinois's Lisa Madigan [a Democrat]  agreed on a $350,000 settlement with Nationwide Title Clearing. Delaware's Beau Biden [a Democrat, and son of Vice President Joe Biden] settled with MERS for $0 and promises that the company would no longer sue for foreclosure in their name and record assignments prior to foreclosure - things MERS already voluntarily agreed to do. (p. 284)
Don't get me wrong. I'm not arguing that Republicans would have better. Dayen describes how Florida was running a serious investigation, and when the Democratic AG was replaced by Republican Pam Bondi, the two women in charge of that investigation were effectively sidelined.

As I said at the beginning, this was truly a bipartisan problem, and I have seen no evidence that the Republicans were or would be better in this regard.

But it was political malpractice by the Democrats.

After the Democrats' defeat in November, there were calls to move beyond "identity" politics, by which people meant, Don't focus so much on issues that are of particular concern to women, or to people of color, or to gender-nonconforming people. Democrats were advised to focus on core economic issues instead.

I've heard two sound objections to this advice.

First, there's a real overlap between so-called identity politics and core economic issues. Part of the negative impact on disadvantaged groups is an economic impact, so addressing "identity" issues includes economics.

Second, the Republicans seemed to do pretty well using White identity politics. Sure, they came up 2.8 million votes short in the presidential election, but they got the votes they needed in the places they needed, so Donald Trump is president elect. And they held onto the Senate and continued to do well at the state level in many places.

But there's another argument not to abandon political support for groups that have been culturally marginalized. In addition to just being the right thing to do, if you combine it with a program of economic fairness for all, wouldn't that be a dominant coalition?

It's certainly an easy story to tell:
Banks were stealing houses. We stopped 'em.
If you want a little more nuance, you can add a couple of qualifying sentences. But those first two sentences are short and memorable, and they would have had a core of truth to them - had the Democrats chosen to make it true.

The narrative power of this argument is strengthened by the presence of a villain. It's dangerous to use demonization as a political tool. I'm appalled by Trump's proposal for a registry of Muslims (who knows if he means it or what will come of it, but he did real harm just by injecting it into the political bloodstream). But when you've got individuals who really did commit crimes, and you really did prosecute them and stop the crime, it's legitimate to talk about that.

Democrats chose not to go that route. As it says in the first block quote up above, "Ongoing foreclosure fraud using previously submitted forgeries and fabrications would be effectively legalized, or at least beyond the reach of state and federal prosecutors."

So instead ...

I think Obama accomplished some truly meaningful, beneficial things, but the stories around them are complicated.

For example, Obamacare really has helped many people, in many ways, but it has serious flaws, too. Just yesterday I was discussing insurance with nursing students at here at Hartwick, and one of them said that she and her mother fall into the subsidy gap: their income is too high to qualify for Medicaid, but not high enough to be able to afford insurance. (I forgot to ask what state she was from, and whether it was one that had refused the Medicaid expansion.)

In normal legislative practice, flaws like that could have been addressed over time, but the Republican Party was dead-set against making the law work better.

That's a story that more or less works in Democrats' favor, and I think there were some efforts to get it across during the campaign. But if your story is, "We tried, but they wouldn't let us," that's essentially a weak story.

If you want a strong story, you need something like, "We did this (against banks that committed crimes)."

The campaign we got could be represented in dialog form:
Democrats: We've done some good stuff, and the Republicans are really scary.
Skeptical Voter: Well, they are kinda scary, but ...
D: They're really, really scary.
SV: You mentioned that.
D: And Trump is a mentally unstable freak.
SV: I have some misgivings about him, but I feel like there's something you're not telling me.
[At this point we leave the campaign as it was and head into alternative-history territory.]
D: OK, I'll be totally candid with you. Donald Trump is right: the system is rigged, and we Democrats have had a major hand in rigging it.
SV: Umm...
D: But here's the thing. The Republicans are way worse than we are. It's true that our actions show we have no intention of actually fixing the rot at the core of the system. But the Republicans are like friggin' carpenter ants that come and feed off the rot and bring the whole house down.
SV: ? ... ? ... ?
D: Trust us.
It didn't have to be this way.

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