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The buzz is that President Barack Obama is pushing hard for a deal with the big banks over the foreclosure crisis in advance of the State of the Union address on Tuesday. Most observers are afraid that the deal will be too small and that the banks will get a slap on the wrist despite playing a major role in creating the financial crisis that led to a recession.
AFL-CIO President Richard Trumka joined a growing chorus calling for a rejection of such a small deal and calling for an investigation of the banks over potential fraud and illegal activity:
We need to hold banks accountable for the fraudulent practices that brought about the worst economic crisis since the Depression. State Attorneys General have been investigating bank fraud, and these critical investigations must not be undermined by a premature and inadequate settlement. We call on the administration to reject any deal that insulates banks from full responsibility.
We commend state Attorneys Generals like New York’s Eric Schneiderman and Delaware’s Beau Biden for their leadership and courage in calling for a real investigation and relief on a scale that helps the millions of homeowners who face a new wave of foreclosures.
The economy is currently weighed down by $750 billion in negative home equity, so relief on a massive scale is needed to lift home values and stimulate the economy by increasing consumer demand. A comprehensive settlement must force banks to write down underwater mortgages. A sum significantly larger than the rumored $25 billion is needed for the economy to grow and create jobs.
Specifically, the administration must stand strong against the Big Banks and insist on:
1. A full and thorough investigation into problems tied to the residential mortgage-backed securities (RMBS) market, and
2. A guaranteed minimum amount of money set aside for reducing the mortgage principal of “underwater” homeowners in key states impacted by the foreclosure crisis.
This is an opportunity for the administration to demonstrate leadership and show that it has the political will to do what’s right for homeowners and right for our economy.
Robert Borosage, of the Campaign for America's Future, hits on one of the key problems with such a settlement, immunity from prosecution for banks who broke the law:
Americans from across the political spectrum are angry that the Wall Street banks blew up the economy and got bailed out, while home owners and taxpayers were stuck with the bill.
This is a fundamental question of justice and democracy. The law is respected only if it is enforced. Cutting a settlement with the banks before there is an investigation violates our basic sense of justice. No one who robbed a bank would be offered immunity, a modest fine and no admission of guilt – before there was an investigation into who stole the money and how much they took.
And there is a fundamental question of whether the democracy can hold the wealthiest few accountable. Americans are increasingly cynical about politicians, believing that Wall Street can buy and sell Washington. This is destructive to our democracy. The President’s campaign will highlight his commitment to fair rules and a fair shot for every American. A sweetheart deal with the banks would be a glaring contradiction to that theme. Any deal, enforced over the objections of the most independent Attorneys General, like New York’s Eric Schneiderman, will fail that test.
What the people want is clear: Investigation before immunity. Penalize the perpetrators, not their victims. Any settlement must have sufficient scope to deal with the scale of the problem. There is an estimated $700 billion of negative equity in underwater homes. While 1 million homeowners have been helped by efforts to save homeowners, 10.7 million homeowners are underwater and that does not count people who have already suffered foreclosure. The top six banks paid bonuses worth $140 billion last year alone, or $420 billion over the last three years. They hold assets of $9.5 trillion. The rumored settlement of $25 billion is barely a slap on the wrist.
Van Jones and George Goehl point out what a good deal must include:
- The banks must pay a minimum $300 billion in principal reduction for homeowners with underwater mortgages and/or restitution for foreclosed-on families.
- There must be a full-fledged, full-blown investigation into Wall Street financial fraud by the Department of Justice.
- There should be no civil or criminal immunity for the banks from future lawsuits.
Current suggestions are that the deal looks to be in the range of $20-25 billion in penalties for the big banks, the same big banks that paid out $144 billion in bonuses and compensation for 2011. Penalties that small offer little incentive for the banks to avoid making the same mistakes again:
U.S. banks raked in $35 billion in profits last summer alone and are currently sitting on a historically high level of cash reserves of $1.64 trillion. The six biggest banks -- Bank of America, Wells Fargo, Citigroup, JP Morgan Chase, Goldman Sachs, and Morgan Stanley -- hold assets totaling $9.5 trillion; and together paid an income tax rate of only 11% in 2009 and 2010, far below the federally mandated 35% corporate tax rate.
Working America and the Courage Campaign are among several organizations offering action items on this issue.
