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The real consequences of holding banks accountable

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Robert Kuttner, in the course of a long post about the federal mortgage fraud task force and what it means to have New York AG Eric Schneiderman on it as a co-chair, includes a number of details about the fecundity of various avenues of investigation. Kuttner looks at the wide assortment of frauds associated with the inflation of the housing bubble and the ongoing foreclosure crisis and notes that real accountability would require a scale far greater than what we've seen so far from any law enforcement or regulatory body anywhere in the country. The scale of true accountability, Kuttner notes, could necessitate a total restructuring of the banking industry:

Bankers have escaped prosecution, and housing has stayed in a deep hole, in large part because of a disastrous decision that Geithner made in early 2009 -- the policy of extend and pretend. Rather than cleaning out and breaking up big banks, Geithner claimed that "market confidence" required the Treasury to collude in the fiction that all was well. It was just a temporary problem of liquidity.

Propping up the banks and their balance sheets, in turn, precluded serious relief of the mortgage crisis, since a write-down of mortgage debt would require banks to acknowledge real losses.

In some ways, a successful prosecutorial initiative returns us to the debates of early 2009: if cleaning up the mortgage mess requires banks to take a big hit to their balance sheets, how then do we proceed with a restructuring of the banks?

Since markets have already acknowledged reality by driving down the value of the banks' share prices, a settlement withY much larger penalties, principal write downs, and even some prison sentences would actually be good for the banking industry because it would provide a fresh start with honest books. We could get beyond the "Japan" phase of this crisis, where the Fed has to keep pumping in trillions of dollars to disguise the real weakness of the economy and the banking industry.

It's helpful that the Fed recognizes the perilous effect of the mortgage collapse on the recovery, since Fed intervention will be central to restructuring and recapitalizing the banking industry after the task force brings bankers to justice.
It's good to see some honest assessment of what the full accountability pathway would mean for the larger banking system. There isn't really a way to put bank executives in jail for criminal behavior, while also pursuing appropriately large civil damages, restitution for defrauded homeowners, and principle reduction to help borrowers now and not see the writing on the wall. Namely, that the big banks can't afford to truly face up to the consequences of their action without being brought to bankruptcy and going through a restructuring process. This is a little discussed fact that undoubtedly has had some impact in the minds of political and financial elites in their thinking of what sort of accountability banks would be allowed to face.

If Kuttner is right and there can be accountability on the scale requisite by the extend of criminal behavior by banks, then the side effect of this will be that we can finally do what should have been done in late 2008 and early 2009 - rebuilding the banking system with stability, not can-kicking, in mind.

There are two core principles at play in the discussion of accountability for illegal behavior during the inflation of the housing bubble and in the ongoing foreclosure crisis. The first is that we must uphold the rule of law and no one should get away with breaking the law (let alone the centuries-old property law on which the entire economy is based) simply because they are a banker. The second is that the foreclosure crisis is producing a massive human cost which needs to be mitigated immediately. These two thrusts do not, in fact, contradict with each other. What Kuttner is identifying is the reality that the largest possible vehicles for aid to suffering and wronged homeowners is robust law enforcement and accountability measures. This is part of the reason why so many of us have pushed for there not to be any settlement of any matter which hasn't been fully investigated. Investigation produces knowledge which informs law enforcement as to what appropriate punishment looks like.

It remains to be seen if this new subgroup that includes Schneiderman will pursue criminal investigations on the scale that Kuttner speculates (and which is clearly necessary). Hopefully good things will come from it. But I'd hope that in the course of these investigations, the consequences of really holding banks accountable do not deter law enforcement from doing just that. Instead, as Kuttner says, seize this opportunity to do what should have been done years ago and leverage this moment to rebuild the banking system in a way that stabilizes the economy and directly helps the American public.

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