Dear Eric Holder: Back off the banks!

Dear Attorney General Holder:

I don't have much pull with you and the Justice Department, but allow me to offer a modest proposal. You know all this work you're doing on creating large settlements with major banks in the United States over conduct from the financial crisis? Just stop. Stop doing it.

This suggestion will come as a surprise to those who have followed my work over the past several years. I have described, in painstaking detail, the crimes committed by banks that led to the financial crisis, spurring one of the largest destructions of wealth in American history. I have shown that the mortgage market of 2002 to 2006 was constructed on a mountain of fraud, and that we must do everything we can to both punish the wrongdoers and ensure that such a disaster never happens again.

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But with these settlements you've reached, the Justice Department has massively distorted and perverted the notion of accountability until it no longer has meaning. Your recent actions, seen by many observers as reflective of a bold and aggressive new stance, amount to little more than a public relations vehicle. The actual victims of the fraudulent conduct being settled will see no relief. Homeowners will get hurt rather than helped. The perpetrators will not be forced to expose their crimes to the world. Just about the only thing these actions accomplish is a reduction in the national debt, which you can more responsibly achieve by taxing bank executives rather than subjecting their shareholders to penalties.

Worst of all, these PR moves masquerading as crackdowns do violence to the very concept of justice. In this case, the illusion of accountability is far worse than no accountability at all.

Let's take a recent example. Citigroup agreed to pay $7 billion to end an inquiry into its fraudulent packaging of mortgage-backed securities during the rise of the housing bubble. Citi sold these bonds to investors under a contractual promise that the mortgages backing them had certain quality standards, yet they knew they were peddling garbage and sold them anyway.

Accounts of the Citi settlement tell swashbuckling tales of hard-charging prosecutors rejecting the bank's lowball offers. Similarly, analysts marveled at how the Justice Department wrung more money out of Citigroup, in relative terms, than in previous settlements with banks like JPMorgan Chase. All of these stories drive a narrative that a newly hard-hitting Justice Department finally stuck it to the bankers this time around.

This perspective falls apart upon the slightest scrutiny. The majority of the settlement, $4 billion, goes to the Justice Department as a civil penalty. You would find it difficult to explain to the average person how the Justice Department was the biggest victim of the securities fraud that helped crash our economy. The giveaway here comes from The New York Times: Citi initially offered a $7 billion settlement, with $3.6 billion going to your Justice Department; federal prosecutors treated the offer like an insult. Then Citi came back with the same bargain, only upping the share to Justice to $4 billion. And you accepted it. At some level, the Citi settlement was an old-fashioned cash grab.

Another $500 million in the settlement goes to state Attorneys General and the FDIC, who were affiliated with the investigation. The final $2.5 billion is earmarked for homeowners in the form of modifications to their mortgages.

First of all, to satisfy this $2.5 billion penalty, Citigroup can count loan restructuring made under the government's HAMP program, for which it is given incentive payments to modify loans. So the bank gets credit for actions it's already taking, and getting rewarded for.

More important, with the expiration of the Mortgage Forgiveness Debt Relief Act, any reduction of mortgage principal Citi gives a homeowner counts as earned income for tax purposes. This means that the homeowners will have to pay thousands of dollars in taxes on any debt relief. Typically people struggling to save their homes don't have bags of cash lying around to pay tax bills on phantom income. Congress could act to fix this by extending the Mortgage Forgiveness Debt Relief Act, but anyone observing Congress these days knows that passing any bill is a long shot. Yet the Justice Department has made at least three settlements like this (with JPMorgan Chase, Ocwen and now Citi), with full knowledge of this potential tax time bomb for homeowners. Despite this, your negotiators did nothing to change the terms of the deal so the alleged beneficiaries aren't socked with bills they cannot pay.

You may notice that one key group is missing from this settlement: the investors who were actually defrauded by these toxic mortgage securities. They get pretty much nothing out of the deal, despite being the primary victims.

Call me old-fashioned, but I figure that when you commit a crime against a set of individuals, at least some of the penalty should go toward restitution for those individuals. You can argue that investors can sue banks themselves for that restitution, but because the securities were sold all over the world, and because investors must reach a threshold of 25 percent of the total securities sold to have standing to sue, that's a difficult task.

If the Justice Department at least forced banks to lay out the facts of the case, that would prove beneficial to future litigation by investors. But Citigroup did not have to admit wrongdoing in this settlement. In fact, as Susan Beck laid out in a spectacular piece at Litigation Daily, almost none of the investigation got revealed in the surprisingly fact-free statement of facts accompanying the settlement. Not one witness is quoted, and only one internal email is displayed. The lack of exposure of Citi's crimes makes the settlement meaningless to anyone wanting to build on DoJ's work and actually hold the bank accountable.

It goes without saying that nobody at Citigroup will see the inside of a jail cell as a result of this misconduct. Citi simply bought its way out of the legal problem, getting immunity for both its toxic mortgage securities deals and the collateralized debt obligation deals (CDOs) based off those securities. Ultimately, shareholders pay the penalty, not the executives themselves. Yes, your Justice Department reserved the right to bring criminal cases against individuals. I'm not sure how you suppressed your laughter when making that claim.

The bottom line is that these settlements help nobody. They represent a corrupt transaction between a bank and a federal agency, enriching one with immunity and the other with cash. They're not only embarrassing to the majority of Americans who believe in the reparative power of justice for society, but they're actively harmful. The public narrative equating these settlements with a sufficient penalty for criminal fraud diminishes the expectation that we can ever see real accountability again. It sets a baseline for punishment absurdly below a tolerable level.

So it's time to pack it in. Send home the investigators, shut down the task forces and working groups. Stop hurting America with your pretensions to aggressiveness. I'd respect honesty about the situation instead of being lied to for public relations purposes over and over again. You're letting the banks off anyway, so you might as well make it official.

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