Banks, Obama Face Immunity Blowback

 | Oct 19, 2011 | 4:00 PM EDT
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Two months ago, I wrote about the Obama administration's actions to get banks lending again, which started with the president refusing to nominate Elizabeth Warren as head of the newly created Consumer Financial Protection Bureau mandated by the Dodd-Frank Act. Warren strongly advocated prosecuting individual bankers and banks. Refusing to nominate her to run the entity she had created was a substantial move. As I indicated in earlier columns, this was essentially the beginning of President Obama "suing for peace."

Obama went on to remove New York Attorney General Eric Schneiderman from a group of state attorneys general crafting a federal resolution to settle the mortgage robo-signing controversy and other mortgage-related legal issues. Schneiderman, like Warren, had insisted on holding bankers and banks legally accountable. The group then floated the idea of providing banks with legal immunity from most mortgage issues if they set aside $20 billion to help homeowners who could not refinance because they were in negative equity situations. The banks did not respond, so the administration tried to force them back to the table using other legal recourses.

This gamesmanship between the public authorities and the money centers over robo-signing has been going on for about a year and a half, and both sides are oblivious to the rising social tensions that are largely attributable to the mortgage and housing crisis. The catalyst for forming the Tea Party was Rick Santelli's rant on CNBC almost three years ago about not wanting to pay for other peoples mortgages. A month ago, Occupy Wall Street began. Although the media tends to portray the two groups as opposites, the synergies between them are substantial, as highlighted by the foreclosure immunity deal (which was off the table just a few months ago).

Trouble Is Brewing

The group of attorneys general responsible for crafting the settlement is having a hard time reaching a consensus. California Attorney General Kamala Harris recently withdrew her state from the group over concerns that there was too much immunity for banks and too little support for homeowners. Nevertheless, the group appears ready to present something to President Obama by the end of the month that will provide banks with broad immunity from prosecution for mortgage fraud, while requiring them to set aside about $25 billion dollars for mortgage restructuring.

This is where synergies between the Tea Party and Occupy Wall Street may be realized. The expectation is that the deal will allow or require banks to reduce the principal-balance mortgages they hold as part of a loan-modification program. Put bluntly, bankers get to keep the money they stole and rich people get to steal the homes they're living in.

I have been watching out for such an event for several years. As the decline in values in the housing market have reached homes of all price ranges, the wealthy, who initially eschewed principal-balance reductions for poor and middle-class home owners, are now advocating it for themselves.


Because millions of homeowners have already lost their homes without being offered principal reductions or legitimate loan modification programs, passing legislation now that allows or requires banks to forgive mortgage debt fuels the class-warfare argument.

Corporate welfare, banker welfare and wealthy homeowner welfare with nothing for the taxpayer or the average citizen -- that's what the Tea Party and Occupy Wall Street are going to see in this legislation. That is going to blow back to the banks and the Obama administration.

The money centers with the largest exposure to residential mortgages, especially jumbos, are Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM). The money centers as a whole will probably rally initially on the news, and then sell off on the public outcry.

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