[ed. See: Wells Fargo Pays $1 Billion to Federal Regulators.]
Mortgages.
A few years ago I tried to add up all the fines that Bank of America Corp. had paid for doing bad mortgage stuff. There were a lot of them, enough that, as the internet decays, the chart that I put together appears to no longer be readable. The headline number -- $68 billion of fines, settlements, etc. at the time -- was big, but more interesting to me was the repetitiveness of the fines. Countrywide Financial Corp. sold bad mortgages to Fannie Mae and Freddie Mac between 2004 and 2008, and Bank of America bought Countrywide in 2008, and everyone sued, and Bank of America reached settlements with Freddie (in 2011) and Fannie (in 2013) over those mortgages. And then it reached a settlement with the Federal Housing Finance Agency over those mortgages in 2014. And then it lost a trial and was ordered to pay more money to the Justice Department over some of those loans, though that was later overturned. And then later in 2014 it reached a $16.7 billion settlement with the Justice Department and other agencies covering, among other things, those same loans. Bank of America basically spent the first half of this decade revisiting its mortgage misdeeds, over and over again, and paying for them each time.
It must have been pretty tedious for Bank of America! I wrote at the time:
Which approach is correct depends on the facts, of course. If the mortgage business is great, and reliably adds to the long-term prosperity of the nation, but occasionally a mortgage banker murders a customer, then you should probably put the murder bankers in prison and not mess with the business model. But if an aspect of the mortgage business -- say, the originate-to-distribute model that many commentators blame for creating moral hazard, loose underwriting standards and a bubble in house prices -- seems to be pervasively bad and dangerous for the broader economy, and if every bank involved in the mortgage business seems to be getting in trouble for the same sorts of misbehavior, then maybe you do want to add to the costs of doing business. Maybe the way to think about it is not as anomalous crime but as a bad business model that imposes social costs, and to force banks to internalize those costs in the form of huge and frequent fines.
Anyway:
Of course this is not purely a story of the fines; the decline of demand for private-label mortgage securitizations matters too. Nor is it a story of the decline of the originate-to-distribute model generally: Nonbank lenders like Quicken Financial have stepped in to replace the big banks in the originate-to-distribute model. (Nor is it even that new: After all, Countrywide was an originate-to-distribute upstart that competed with the big banks, until Bank of America bought it.) Still it is worth commemorating. People spent years arguing that any mortgage fines, no matter how huge and repetitive, didn't matter, that they were less than the profits the banks made from their misconduct, that they were just a "cost of doing business," that they would change nothing. But the fines were enough of a cost of doing business for Bank of America that it's now more or less out of the business.
Mortgages.
A few years ago I tried to add up all the fines that Bank of America Corp. had paid for doing bad mortgage stuff. There were a lot of them, enough that, as the internet decays, the chart that I put together appears to no longer be readable. The headline number -- $68 billion of fines, settlements, etc. at the time -- was big, but more interesting to me was the repetitiveness of the fines. Countrywide Financial Corp. sold bad mortgages to Fannie Mae and Freddie Mac between 2004 and 2008, and Bank of America bought Countrywide in 2008, and everyone sued, and Bank of America reached settlements with Freddie (in 2011) and Fannie (in 2013) over those mortgages. And then it reached a settlement with the Federal Housing Finance Agency over those mortgages in 2014. And then it lost a trial and was ordered to pay more money to the Justice Department over some of those loans, though that was later overturned. And then later in 2014 it reached a $16.7 billion settlement with the Justice Department and other agencies covering, among other things, those same loans. Bank of America basically spent the first half of this decade revisiting its mortgage misdeeds, over and over again, and paying for them each time.
It must have been pretty tedious for Bank of America! I wrote at the time:
A popular criticism of the modern approach to punishing bank misdeeds -- giant fines imposed on the banks, not much in the way of individual punishments and a preference for settlements rather than trials -- is that it turns the fines into just a "cost of doing business," normalizing misbehavior rather than preventing future wrongdoing.
If a bank does a bad mortgage thing, and you find the person who did the thing (or who signed off on the thing, or who ran the bank when it did the thing, or whatever), and you put him in prison, then that sends a powerful message that the thing was a crime, that it was not business as usual, that it could not be tolerated. If, on the other hand, you hold no individuals responsible, but come back to the bank every year and say "hey remember that mortgage thing? that'll be another $2 billion," then arguably you send the message that the bad mortgage thing was expected in the mortgage business, and that fines for doing it are just a normal part of life.But you could say that same thing with a different emphasis. If a bank does a bad mortgage thing, and you find the person who did the thing and put him in prison, then the bank could reasonably conclude that the problem was that person, that the bad thing was anomalous, that there is nothing wrong with its mortgage business model as a whole. If, on the other hand, you come back to the bank every year and fine it a few billion dollars for the same mortgage thing, then that will send the bank a message about the costs and benefits of the mortgage business. The message is that the misconduct is not the work of a few bad criminals who are Not Like Us, but that it is endemic to the business model. The bank might reasonably conclude that frequent multibillion-dollar fines are a cost of doing business, and not worth it.
Which approach is correct depends on the facts, of course. If the mortgage business is great, and reliably adds to the long-term prosperity of the nation, but occasionally a mortgage banker murders a customer, then you should probably put the murder bankers in prison and not mess with the business model. But if an aspect of the mortgage business -- say, the originate-to-distribute model that many commentators blame for creating moral hazard, loose underwriting standards and a bubble in house prices -- seems to be pervasively bad and dangerous for the broader economy, and if every bank involved in the mortgage business seems to be getting in trouble for the same sorts of misbehavior, then maybe you do want to add to the costs of doing business. Maybe the way to think about it is not as anomalous crime but as a bad business model that imposes social costs, and to force banks to internalize those costs in the form of huge and frequent fines.
Anyway:
One measure of how much things have changed in the last decade at Bank of America Corp.: The firm has stopped reporting fees from its mortgage business. ...
After billions in fines and payouts to regulators and investors in the years after the financial crisis, Bank of America has moved away from securitizing and servicing residential mortgages. The firm originated $9.4 billion of new mortgages in the first quarter; in 2009, it topped $100 billion in one quarter.There is still plenty of mortgage interest from loans held on Bank of America's balance sheet, "but the business of making mortgages to sell them -- the specialty of subprime lender Countrywide Financial Corp. that Bank of America bought in 2008 -- has largely become a relic." Regulators and prosecutors made it incredibly tedious for Bank of America to be in that business, and now Bank of America ... just ... isn't.
Of course this is not purely a story of the fines; the decline of demand for private-label mortgage securitizations matters too. Nor is it a story of the decline of the originate-to-distribute model generally: Nonbank lenders like Quicken Financial have stepped in to replace the big banks in the originate-to-distribute model. (Nor is it even that new: After all, Countrywide was an originate-to-distribute upstart that competed with the big banks, until Bank of America bought it.) Still it is worth commemorating. People spent years arguing that any mortgage fines, no matter how huge and repetitive, didn't matter, that they were less than the profits the banks made from their misconduct, that they were just a "cost of doing business," that they would change nothing. But the fines were enough of a cost of doing business for Bank of America that it's now more or less out of the business.
by Matt Levine, Bloomberg | Read more:
[ed. Or you could do both: fine banks and prosecute bank executives who 'did the thing'. Why is it an either or proposition?]
[ed. Or you could do both: fine banks and prosecute bank executives who 'did the thing'. Why is it an either or proposition?]
