The obscene greed-and-arrogance stories emanating from Wall Street are piling up so fast, it's getting hard to keep up. This one is from last week, but I missed it – it's about the foreclosure/robo-signing settlement that was concluded earlier this year.
The upshot of this story is that in advance of that notorious settlement, the government ordered banks to hire "independent" consultants to examine their loan files to see just exactly how corrupt they were.
Now it comes out that not only were these consultants not so independent, not only did they very likely skew the numbers seriously in favor of the banks, and not only were these few consultants paid over $2 billion (over 20 percent of the entire settlement amount) while the average homeowner only received $300 in the deal – in addition to all of that, it appears that federal regulators will not turn over the evidence of impropriety they discovered during these reviews to homeowners who may want to sue the banks.
In other words, the government not only ordered the banks to hire consultants who may have gamed the foreclosure settlement in favor of the banks, but the regulators themselves are hiding the information from the public in order to shield the banks from further lawsuits.
Secrets and Lies of the Bailout
To recap: in the foreclosure deal, 13 banks agreed to pay a total of $9.3 billion to settle their liability in a number of areas, including robo-signing, which is just a euphemism for mass-perjury – robo-signing is the practice of having low-level bank employees sign documents attesting to full knowledge of case files in court foreclosure actions, when in fact they were signing hundreds of files per day, often having no idea whether the paperwork was correct or not.
It was done across the industry and turned housing cases across America into nightmares of jumbled and/or forged paperwork, in which even people who did not deserve to be thrown out of their homes were uprooted thanks to systematic errors by faceless bureaucrats who cut legal corners purely to save money.
All the major banks were guilty on a mass scale, but they worked with federal regulators like the Fed and the Office of the Comptroller of the Currency to secure this wide-ranging, industry-saving settlement, which not only covered the robosigning epidemic but a host of other bad or illegal practices, like the wrongful denial of modifications and the improper levying of (often hidden) fees.
Minus this crucial settlement, banks would have faced enormous uncertainty about their legal liability going forward, and getting a deal that not only gave these companies some legal closure but allowed them to pay pennies on the dollar for their illegal activity was a massive coup for the whole finance sector.
Only $3.6 billion was earmarked for cash payments to the nearly 4 million homeowners covered in the settlement. Most of the remainder of the deal was in other forms of non-cash relief, i.e. modifications or principal reductions.
Now, at the time of the deal, press releases by the Fed and the OCC stated that part of the reason they'd fixed on that particular settlement amount was that regulators had uncovered that banks had made errors or committed illegal acts in about 6.5 percent of the mortgage files reviewed. In other words, the error rate was an important component of this calculation.
But it turned out that this error rate had been calculated with the help of several consultant firms regulators had ordered the banks to hire. Regulators had mandated the hiring of these "independent" consultants back in 2011, and the list of companies included Promontory Financial Group, PricewaterhouseCoopers, Ernst & Young, and Deloitte & Touche. These private firms were hired to review the banks' loan files in search of errors, and collectively were paid by the banks over $2 billion, a staggering sum which ultimately worked out to over $20,000 per file.
With such highly-paid help, it would seem impossible that these consultants could screw up so simple a task as figuring out how many of these mortgage files were corrupt. Regulators came up with the 6.5 percent number this past January, then shortly afterward revised the number downward, saying that only 4.2 percent of some 100,000 mortgage files reviewed were compromised.
But that low number stank so badly that even the Wall Street Journal was moved to check it out, and in late February, in a story called "Foreclosure Files Detail Error Gap," the paper discovered that the error numbers were almost certainly very much higher. From that piece:
A breakdown of the information provided to the regulator shows that more than 11% of files examined for Wells Fargo WFC +0.39% & Co. and 9% of those for Bank of America Corp. had errors that would have required compensation for homeowners, said people who have reviewed the figures. A narrower sample of files – representing cases selected by outside consultants – showed error ratios of 21% for Wells Fargo and 16% for Bank of America, the people said.
The OCC findings appear skewed by the outsize contribution of one bank, J.P. Morgan Chase JPM -0.39% & Co., which reported an error rate far below rivals that oversaw a much larger universe of loans.
J.P Morgan was responsible for more than half of the completed files counted in the OCC review and reported compensation-worthy errors in just 0.6% of cases, according to people familiar with the figures.
So you have numbers from all of these other banks coming in at 9 percent, 11 percent, even 21 percent, and yet somehow J.P. Morgan Chase came in at 0.6 percent. The OCC just took the Chase numbers and averaged them together with the rest and ultimately came up with the 4.2 percent number.
So how did Chase come out so squeaky clean? Well, it seems they developed quite a rapport with the government-mandated consultants who were hired to review their loan files. This is from that WSJ report:
Two Deloitte employees who performed the review for J.P. Morgan in a Brooklyn office building said workers were encouraged by supervisors to examine pools of loans they knew would be less time-consuming or error-prone as they tried to hit loan quotas.
One of these employees said that at an event last year known in the Brooklyn office as "March Madness," Deloitte officials encouraged reviewers to avoid problematic loans originated by EMC Mortgage, a troubled mortgage lender J.P. Morgan acquired in 2008.
So basically Chase allegedly warned the consultants off their problem loans and incentivized the consultants to examine the less-fucked-up loans. Employees of another of Chase's auditors, Promontory, were reportedly given gift cards of up to $500 for "completing a certain number of files quickly."
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