The latest settlement between major mortgage lenders and government officials looks set to be squared away, with banks paying about $10 billion in restitution and relief to people victimized by illegal foreclosure processes in 2009 and 2010. The deal was almost unraveled Friday afternoon as Federal Reserve officials tried to get an extra $300 million, but ultimately they backed down.
Obviously $10 billion is a lot of money, but the appropriate background for this kind of settlement is proposals for radical reform of the financial sector that emerged in the years after the economic crisis. Passing sweeping federal legislation is difficult, and business lobbyists have a lot of clout. The simultaneously stumbling of the industry into large-scale legal problems provided another lever to push for big structural reforms, and Obama administration regulators and the overwhelming majority of state attorneys general have not really wanted to pull that lever. Anything that puts a finite, affordable price tag on banks’ liability is basically good news for the banks, as it means they can come that much closer to putting “robosigning” and other legal woes behind them.
In a separate but thematically related development, banks won a major clawback of proposed Basel rules on liquidity.
The idea here was to have a global regulatory standard that would make banks less likely to end up in liquidity squeezes that require emergency central bank lending. The banks successfully (and not totally implausibly) argued that there simply aren’t enough safe liquid assets in existence to conform to the initial version of the rule without sparking a global crunch in financial activity. This is totally separate from the robosigning issue, but you can think of them as both regulatory matters where the desire for a tame and stable financial sector is in tension with the desire for a high level of lending activity in the short term to support growth.
