Will the Attorneys General Sell Out the Pension Funds?

Abigail Caplovitz Field, Huffington Post

A shocking aspect of the proposed foreclosure fraud settlement among bailed-out banks, the state attorneys general, and the feds has rightly gotten a lot of attention, namely the bailed-out banks’ ability to pay their “penalty” with other people’s money. I confess, when I first heard about it, I figured it was a testament to the federal government’s craven capitulation to the bailed-out banks. (Let’s call them the B.O.B.s, rhymes with S.O.B.s) But now I know it’s much worse than that, thanks to excellent reporting by David Dayen. The federal government reallywants the B.O.B.s to use pension fund money to pay their “penalty.”

Now, readers know I’m not exactly a Pollyanna, but I feel like one now. See, I thought our federal government understood that the right way to penalize someone with a fine was to actually make them pay the bill. I thought the feds realized the best way to punish the banks was to have them cough up cash into a BP spill-type fund, and have 50 special masters (one per state) use it to pay down mortgages, thereby punishing banks and helping homeowners. I just figured the feds had rushed things so much, doing essentially no investigation, that they didn’t have the goods to leverage a better deal. But no. The feds see the banks’ ability to spend firefighters’, teachers’ and cops’ money as a design feature, not a flaw.

(Yes, private investors besides pension funds are affected too. I am fixating on the pension funds because attorneys general usually protect state pension funds from theft.)

See, on a conference call that included Dayen, HUD Secretary Shaun Donovan was boasting about how the settlement would deliver up to $40ish billion in principal reductions. That boast amazed people, because that number’s never been on the table; at best it’s been $17 billion in principal reduction, plus penalties of $8 billion. Donovan then explained the feds are um, banking on the B.O.B.s using other people’s money to pay the penalty. See, the banks only get 50 cents “credit” toward the penalty total for every $1 of other people’s money they write down. So when Donovan says the feds are expecting to get $2 or more in principal reductions for every $1 in “penalty” total, he apparently means the feds are hoping every dime of principal reduction comes out of a pocket other than the B.O.B.s’.

How can the AGs wink and nod and sign off on a deal that everyone expects will steal billions from investors, including pension funds? The NY AG’s office under Eric Schneiderman’s predecessor, Andrew Cuomo, incarcerated people for stealing from the pension fund. Schneiderman himself has sued Bank of New York Mellon for defrauding the pension fund. How can he possibly ink a deal that could take money from the fund for harm the fund didn’t cause?

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