Today the federal government announced a $25 billion settlement with five major banks accused of abusive mortgage practices. While the settlement sounds impressive in scope, and the funds offer a modest promise of relief for some homeowners who are struggling, it only scratches the surface of meaningfully addressing the problem. The agreement indemnifies the five banks – Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup Inc and Ally Financial Inc – from civil government claims over faulty foreclosures and mishandling of requests for loan modifications, in exchange for the banks $25 billion.
The payback sounds good, until you remember that the government–meaning us–propped the banks up with over $200 billion in Troubles Asset Relief Program (TARP) funds. The five banks covered by the settlement agreement received over $100 billion. Some of those were eventually paid back, but over $100 billion remains outstanding, and these same banks extended the economic downturn by arbitraging government interest-free loans into risk-free purchases of T-bills. In other words, the government loaned the banks money at no cost, then borrowed it back at interest from those same institutions. I want some of that action. Anyway, as a result, banks didn’t want to make loans with actual risk to the folks building homes, buildings, and businesses–the actions that create meaningful non-Wall Street employment. And now, after crusshing our economy through misfeasance and malfeasance, they’re deigning to repay a fraction of what was gifted them in exchange for partial immunity.
Willie Sutton would’ve loved this deal. “Let me understand this, your Honor. I stole 100 large, but can go free if I give 25 back to my victims, and you can’t prosecute me for the theft? I’m good with that! Thanks Judge.”
Pardon me if I am unimpressed by the banks magnanimity.
Now let me share a better story about a bank and its leadership. In this story, a bank comes to town to take over the assets of a local institution–Horizon Bank–gone under, with the approval of the FDIC. Horizon went under caught up in the hubris of the housing bubble. The failed bank went into a 50-50 partnership with a local developer, intent on building on environmentally-sensitive and locally beloved land. Due to both the intensity of the local opposition and the challenging nature of dealing with extensive environmental challenges, compounded by the financial downturn, the bank went belly up.
At the time Horizon failed, their assets were largely sold to Washington Federal, a Seattle-based thrift. The real estate partnership was part of the deal. As mayor at the time, I saw the opportunity to acquire, at a reasonable price–and more importantly, at a price the City could afford without sacrificing its general funds–lands long identified as valued by the community. I immediately made contact with Washington Federal’s President, ensuring he was aware of the City’s interest in the property.
For those unaware, buying or selling to the government is never the easiest option. The rules require considerable extra time; in a game where time is money, many chose not to deal with government wherever possible. Washington Fed’s president was game, though. He stated an interest by the bank in being a good corporate citizen of Bellingham. At first, I was skeptical. He dressed in a very un-Bellingham way. Where the local uniform is business-very-casual, the Prez dressed like a, well, New York banker. And while he talked about fiduciary responsibility, I spoke of community values. But we both understood that we shared a vision of delivering something important to Bellingham.
The conversation dragged on, as complication after complication arose. At one point, the Prez could almost literally not talk to himself, as he represented different sub-entities of the bank suing each other to resolve ownership issues around the land and the failed partnership. It sounds funny now, but it was serious. Through it all, though, it became clear that the man had integrity; he meant what he said. And through the crucible of these trials we developed a relationship of trust and respect.
Over time, there were challenges of funding sources, of political gamesmanship by some leery of the deal, of accidental and deliberate misrepresentations. Anyone looking for an excuse to walk away could have, and would have. But this story has a happy ending: After almost 18 months, the deal was finally struck. Now that land is a legacy to the integrity and civic-mindedness of a bank new to town; a bank that chose community over the lure of quicker profits. And a bank president who demonstrated that not all banks, nor all bank leaders, think only in dollar-and-sense values. We need to remember this, as we see too many bad examples parading daily through the news.