Mortgage Settlement as Attorney General Sellout: Deal is Not Done, and Final Version Guaranteed to be Worse Than Advertised

You know it’s bad when banks are the most truthful guys in the room.

Remember that historical mortgage settlement deal that was the lead news story on Thursday? It has been widely depicted as a done deal. The various AGs who had been holdouts said their concerns had been satisfied.

But in fact, Bank of America’s press release said that the deal was “agreements in principle” as opposed to a final agreement. The Charlotte bank had to be more precise than politicians because it is subject to SEC regulations about the accuracy of its disclosures. And if you read the template for the AG press release carefully, you can see how it finesses where the pact stands. And today, American Banker confirmed that the settlement pact is far from done, and the details will be kept from the public as long as possible, until it is filed in Federal court (because it includes injunctive relief, a judge must bless the agreement).

This may not sound all that important to laypeople, but most negotiators and attorneys will react viscerally to how negligent the behavior of the AGs has been. The most common reaction among lawyers I know who been with white shoe firms (including former partners) is “shocking”. Let me explain why.

Negotiating of large, complex deals (or even little deals) does not happen in one fell swoop. Even when the two sides have outlined the major terms, and in sone cases hammered out the really important ones in some detail, there is still a great deal of negotiating that takes place in finalizing the text of the contract. The negotiation over the definitive agreement makes a great deal of difference on how fair the pact turns out to be. For instance, one of the sayings of transaction lawyers is “He who controls the document controls the deal.” The party that writes up the initial version of the contract has undue influence because that becomes the default and the other side has to negotiate back from that language.

As attorney Max Gardner said via e-mail (boldface ours):

I would never tell a client that I had settled a case or claim against a creditor until the ink was on the final written settlement agreement. I would of course advise the client of the verbal offer and secure the client’s acceptance but would always say something like “don’t spend any of the money because as Yogi might say it ain’t over until we have the signed agreement and their check has cleared my trust account.” An attorney would be guilty of serious ethical violations if he or she told a client we have a settlement with BoA and it is final before the deal was closed out by written agreement and in my bankruptcy practice the agreement was approved by the court. The AGs have said this agreement must be approved by a Federal District Court Judge so really why would you make such public announcements before at the least a written agreement signed and inked by ALL of the parties.

Why is it deeply troubling that the attorneys general have gone along with the Administration’s messaging and have all fallen in line with the “biggest Federal-state settlement ever” when no such settlement in fact exists? This isn’t just acceding to the Administration’s pet wish to build on its State of the Union PR. They’ve completely abandoned their negotiating leverage at a critical stage.

Let’s look at this equation. The Administration and the banks both want a pro-bank deal (the only minor point of difference is how much in populist gestures the banks have to submit to in order to get the much more valuable bennies they want). The only parties that cared to any degree about ordinary citizens were the dissident AGs. But they now have now given up any bargaining leverage over how this deal turns out.

The only power any party has in a negotiation is his threat to leave the bargaining table. The AGs can no longer do that. They’ve taken star turns, made ringing pronouncements of how great this pact is. They can’t possibly reverse themselves mere weeks down the road and say, whoops, this deal isn’t go great after all.

The AGs had to have known what they were doing in capitulating. Delaware’s Beau Biden was one of the most outspoken AGs after the Schneiderman destabilized the opposition by putting himself on the sidelines, making it clear he had not signed on when most other AGs remained silent. Yet in an interview with Dylan Ratigan early last week, he sounded as if the fight had been beaten out of him, that he was resigned to signing on to the agreement if he could preserve the MERS suit he had filed and add bank names to it later if the facts warranted. What sort of veiled or not so veiled threats did the Democratic party operatives make to get him to fall into line?

I hate using Biden as an example because he resisted down to the end. I don’t see how any seasoned attorney could possibly have misunderstood what he was giving up. Maybe the last holdouts felt even en bloc that they had no sway and even if they all stood aside, it would hurt them with little upside for their constituents. But agreeing to a pig in the poke would never be acceptable in the private sector, and the AGs can’t pretend not to know how outside the pale their conduct was.

We’ve seen an analogous process at work in the Dodd Frank bill. It was widely described as a “bill to come up with a bill,” with a lot of provisions either subjected to studies or kicked over to regulatory rulemaking to come up with a final version of the provision. The result has been that it has given the banks another go at the bill, and various media reports indicate that they’ve done a very good job in blunting the impact of many provisions.

Now some readers might argue that this analogy is unfair, that the mortgage settlement is much further along that Dodd Frank was. That might seem to be true. However, the attorneys general are not experts in securitization, and benign-sounding language can have implication that they don’t appreciate. And some of the responses from AG offices to simple questions suggest they are over their heads on this deal.

And the American Banker article indicates that the deal has a lot more points still open that the Administration’s victory lap would lead you to believe:

…a fully authorized, legally binding deal has not been inked yet….A representative for the North Carolina attorney general downplayed the significance of the document’s non-final status, saying that the terms were already fixed…

Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. Instead, there are a series of nearly-complete documents that will be attached to a consent judgment eventually filed with the court. That truly final version will include things such as servicing standards, consumer relief options, legal releases, and enforcement terms. There will likely be separate state and a federal versions of the release…

Whatever the reason for the document’s continued non-appearance, the lack of a public final settlement is already the cause for disgruntlement among those who closely follow the banking industry. Quite simply, the actual terms of a settlement matter.

“The devil’s in the details,” says Ron Glancz, chairman of law firm Venable LLP’s Financial Services Group. “Until you see the document you’re never quite sure what your rights are.”…

And there is plenty more still to be worked out under all circumstances.

“Even once we get to the final terms, the servicers we’re told are going to be allowed to develop their own plans,” says NCLC’s Thompson. “They’re going to have three months to develop those from when the settlement is approved by the court. We are a long way in lots of ways from being able to kick the tires.

Now why the rush to get a photo op? I don’t buy that this was driven by election timing. A lot of studies show undecided voters make up their minds in the last month or at most two before the election. Big news is more effective closer to the election.

Maybe the Administration believes its own PR and thinks this measley program will help the housing market, or more important, secure the fealty of banks. But my guess is that the fact that 15 AGs concerned about the negotiations had met is what pushed the Administration into high gear. They did not want a meaningful, cohesive opposition forming. In addition, I am certain some evil genius in the Administration understood full well the value of destroying the AGs’ bargaining leverage before the final phase of negotiations.

Oh, and what about the other bombshell in the American Banker story:

American Banker asked The Department of Justice, the Department of Housing and Urban Development, and the offices of Attorneys General in Iowa, North Carolina and Colorado for a copy of the settlement last night. Only Iowa, North Carolina and the Department of Justice have responded, saying that the document would not be available until it is filed with the court on a yet-undetermined date.

Diane Thompson, an attorney with the National Consumer Law Center, said it was “unusual” that a settlement agreement had not been released. But the officialdom has gone further than that, and has said they won’t release the document until it has to be made public, via a Federal court filing.

Why would they choose to delay publicizing such important information? The most logical reason is they want it to be public the bare minimum amount of time possible prior to court approval, so as to give opponents (read aggrieved investors) the tightest window possible for filing motions opposing the pact. This deal was done within a very small group, and the two parties most affected, homeowners and investors, were and continue to be kept as far away from the process as possible.

And there are signs that AGs were really over their heads on this one, independent of the Administration’s gamesmanship. This was from reader LucyLulu:

Spoke yesterday with an associate of my attorney general yesterday and had a most frustrating conversation….

One of the many interesting tidbits she did share however (and I am unsure how reliable her info was) was that no investor owned modifications of loans would occur without first obtaining consent of the investors…I tried to nail down how this consent would be obtained, she was reluctant to provide details, just to say how consents from shareholders are normally obtained.

Now this may simply be an out-of-the loop staffer making things up, but another correspondent heard pretty much the same “we’ll get approvals” palaver from another AG’s office. I have to tell you, they most certainly WON’T obtain consents as they do in shareholder land (as in preparing and sending out proxies and soliciting votes on contested matters). Moreover, the standards for what level of approval is required varies by deal: some it’s a simple majority (presumably by par value), some require majority approval of each tranche, some require a supermajority (2/3 or even 75%). The Administration is likely to be taking the position that they don’t need consent in most deals if the mod is NPV positive. And given that they can pick the parameters that are most flattering (loan level v. portfolio level, discretion over time horizon chosen for measurement), I’d suspect that investor consent will not be obtained (unless investors start making serious noises, which seems less likely than it did last weekend).

Reader Mikent was correct when he called this deal a robosettlement. Just like its namesake, it’s more about getting it done than doing it right.