Bank of America Settlement: Yet Another Wrist-Slap for Banks
[NOTE: This is a guest post by Dan Bischoff.]
Bank of America is reported to be in the final stages of settling -- for $8.5 billion -- a suit brought by institutional investors over mortgage securities that went south when the housing bubble burst. It would be the largest payout yet on the subprime mortgage market disaster, though almost certainly not the last. In fact, it's probably intended to be a model for all the rest.
And if that's so, then BofA, its shareholders and the rest of the banking system can rest easy. Sure, the sums at hand are large -- but they're nothing compared to the true costs of the housing disaster, which is going to continue weighing down the U.S. economy for years.
Behind the deal
The New York Fed, as BNET has noted before, is both a plaintiff in this suit and a regulator of BofA. So you sort of have to suspect that the lawsuit -- a representation and warranties case, a kind that almost never goes to trial because plaintiffs don't have access to the underlying loan documentation before discovery to prove their claims -- was settled under some heavy pressure from the Fed.
Up to now, the Fed's interest in all its maneuverings during the crisis has been preserving the system as a whole, and ultimately those who sit at its very top. So while $8.5 billion sounds like real money, I suspect it's a deal -- quite possibly a steal for BofA.
And, of course, one advantage of settling these claims this way is that there will be no open discovery in court, so it's hard to tell who got what at what cost, or just how illegal the actions of the different parties were during the boom.
Just use your fingers and toes
Only one aspect of the deal is certain: It does absolutely nothing for the millions of Americans who bought homes at ridiculous rates with instruments they didn't understand and are now homeless or in foreclosure. Their plight will continue to drag down the domestic economy.
Given that it took two years to get just these relatively few parties to come to an agreement about this paper, which they all knew was worse than worthless going in, you have to assume the banks are going to be relentless in sticking it to the pathetic saps at the very bottom of the market who have no white-shoe law firms to fight for them.
But let's look at the deal itself for a second. If, as Bloomberg says, the underlying value of the bonds involved in this case is $84 billion, and not the $56 billion cited by the WSJ, the deal represents about ten cents on the dollar -- the standard discount rate for junk paper settlements.
And if the deal actually protects BofA from claims against all $424 billion worth of bonds in Countrywide's portfolio (BofA bought Countrywide in the early days of the panic for about a third of the value of this settlement), it's actually about two cents on the dollar. That's fantastic -- for BofA and its shareholders.
Third little pig meets the angry birds
And that's a whtewash on what really went down. So far we've been analyzing the deal entirely in terms that suits and quants understand, checking the percentages and doing derivations on the equations. But the housing market actually has a real product too: Physical structures, a stick in the ground, as we used to say.
And only if we take the time to look at what the industry actually produced during the deregulated boom of the past few years do we get even a vague notion of the dimensions of the fraud perpetrated by the system.
Because the base value of a home for the American middle class has always been its resale -- at the end of a mortgage, hopefully, when all the equity put into it by the homeowner can be realized. Since World War II, that value has been remarkably resilient over the life of two or three or even four mortgages. Houses built of brick and mortar, with copper piping and plaster walls, last a long time, and a remarkably high percentage of the stock, perhaps as much as half, was built to last several generations -- built, you might say, by the third Little Pig.
But the deregulation mania that fueled Countrywide and BofA and all the other banksters who swooped down on housing when they knew no government was watching extended to construction standards as well. The consortium of politicians, developers, and bankers who ran these deals became the Angry Birds of American housing -- much of the construction thrown up for a bank note had plywood floors, PVC plumbing, faulty drywall made in China, roofs that were stapled on and moldings and window frames that were glued on.
In other words, they were "built to the mortgage," says Michael Meredith, an architect at MOS, a New Haven firm dedicated to sustainable architecture -- intended to last just 25 years, or even less. Their resale value at the end of the mortgage will be nil without repeated and expensive refitting.
A quick trip among the abandoned suburbs of Las Vegas or the reclaimed swamplands of Florida, where houses built less than a decade ago, already abandoned by their first owners (if they ever had an occupant), makes this apparent. Many of these shelters are falling in -- roofs ascant, mold growing in the spaces where insufficient insulation was laid, flash-poured concrete foundations crumbling. Mile after mile of once pristine countryside was scarred by this sort of toxic development, and bulldozing it to restore the land would cost billions more.
I'd say $8.5 billion to walk away, if that is really what happens, is a great deal. Catapult!
Dan Bischoff writes about art for The Star-Ledger in New Jersey; he was European editor for WorldBusiness and National Affairs Editor for The Village Voice.