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Elizabeth Warren, Top Conservative Seek To Expose True Cost Of Legal Settlements With The Feds

By Alan Pyke  

"Elizabeth Warren, Top Conservative Seek To Expose True Cost Of Legal Settlements With The Feds"

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Sens. Elizabeth Warren (D-MA) and Tom Coburn (R-OK) proposed a bill on Wednesday to curb federal prosecutors’ tendency to exaggerate the size of legal settlements they eke out behalf of the public. If the Truth in Settlements Act were to pass, government deals with firms suspected of misconduct will be subject to far greater transparency.

The law would require federal officials to give specific explanations of how a settlement will actually affect a company’s bottom line whenever they make a written, public reference to the dollar figure of the deal. That means that every press release about the deals would have to acknowledge any portions of a settlement that are tax deductible or that are tied to actions that would already be in the company’s best interests, such as the “homeowner relief” provisions of many settlements related to mortgage and foreclosure abuses. The companies will also have to report any tax deductions tied to legal settlements. Had such requirements been in place in 2012 and 2013, the public might have gained a clearer understanding of several high-profile deals with some of the country’s largest financial companies.

Take, for example, the Justice Department’s settlement with JP Morgan from last fall. Headlines touted a $13 billion deal, the largest financial penalty for corporate misconduct in U.S. history. But that figure is wildly misleading. Almost all of the settlement will get written off on the bank’s 2013 taxes, and a substantial chunk of it comes in the form of homeowner relief actions that don’t cost JP Morgan anything and are in fact in the bank’s financial interests. The supposedly historic deal actually cost the bank less than half of the sticker price from the headlines. That didn’t stop the bank’s lawyer from complaining about it, but it did stop the public from understanding the reality of the punishment for massive misconduct by the country’s largest financial company. Journalists got that inflated figure from the prosecutors who made the deal and who have a clear interest in appearing as tough as possible on JP Morgan. The law proposed Wednesday could therefore give prosecutors an incentive to drive a harder bargain in future negotiations.

The JP Morgan deal is just one of many recent government settlements on which the Warren-Coburn bill would shed light. A similar settlement with the mortgage servicing giant Ocwen lets the company pay its penalties “with someone else’s money,” as David Dayen noted in the New Republic. The JP Morgan and Ocwen deals are likely to serve as templates for similar settlements with other firms, meaning that the disconnect between prosecutors’ public statements and their actual actions is liable to spread unless something like the Warren-Coburn measure comes into force.

Perhaps the best ongoing example of the problem their bill would address is the landmark National Mortgage Settlement (NMS) announced in early 2012. The NMS was supposed to hold the five largest mortgage servicers to account for rampant abuses in their foreclosure practices. It was meant to penalize banks to the tune of $25 billion and provide huge piles of money to homeowners who had been harmed by robosigning and other fraudulent conduct. That deal never produced anywhere near as much monetary relief for homeowners as promised — many victims received such tiny checks from the banks that they didn’t even bother cashing them — and banks continue to violate the terms of the settlement a full two years later. The deal is such a failure that the government has repeatedly altered the fine print, a tacit acknowledgment that the original settlement was poorly designed and enforced.

All of these deals represent decisions by the government not to take strong evidence of misconduct to court. “Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement,” Warren said in the release announcing the Truth in Settlements Act.

The bill would also require government agencies to report annual statistic on confidential settlements and provide case-by-case explanations of why they agreed to confidentiality provisions in specific deals. “Our bill gives taxpayers the transparency tools they need to access real information and numbers regarding enforcement settlements,” Coburn said.

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