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Business Breakdown: Why Are Wall Street Banks Coughing Up $26 Billion? Why Are Wall Street Banks Coughing Up $26 Billion?

Yesterday, the government got Wall Street banks to pay $26 billion in penalties for screwing people over. Is it enough?

Yesterday, the full weight of the American legal establishment—a posse of 49 state Attorneys General headed up by U.S. Attorney General Eric Holder—announced a $26 billion settlement with five major banks whose names you know (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial) and several others you may not. President Obama, who practically glowed while announcing the settlement, hopes that this is long-awaited move will bring some justice to homeowners who got screwed over during the recession and help boost the economy. Let us explain why he's so optimistic.

What the banks did wrong. After the housing bubble collapsed in 2008, home prices dropped precipitously. Some people lost their jobs and couldn’t make their payments, others were unable to refinance home loans they couldn’t afford. Either way, more and more people were losing their homes to the banks. But the banks weren’t playing fair: When they filed the legal documents necessary to seize homes, they relied on “robo-signing”—fake signatures—and other forms of fraud. That’s a no-no, and as the practice was widely uncovered in 2010, it raised worries that the whole process was screwed up and would result in a wide-ranging and very expensive legal mess. Various government prosecutors got involved, culminating in a nationwide, joint federal-state investigation and then, settlement talks.

What the banks have to do. The banks have to pay $26 billion (depending on the final number of companies involved, it could be as much as $45 billion). The bulk of the money will go toward helping about one million people refinance their home loans or lower their principal so they’re not “underwater”—owing more money on their home loan than the house itself is worth. The banks will also pay about $2,000 each to 750,000 people whose homes they foreclosed on between 2008 and 2011. They’ll also pay federal and state penalties. In return, they’ll have legal immunity for various practices related to how they managed mortgages.

Are people pissed? You bet they are. Getting a check is really not enough after losing your home in shady circumstances, and critics note that the $26 billion is a drop in the bucket compared to the $700 billion in underwater mortgages in the country. The settlement will only cost the banks about half of their collective profits last year. And we’re not seeing any fundamental fix in the way they handle mortgages to ensure we don’t see this kind of chicanery in the future. The banks managed to get away with a pretty small penalty here (even if it’s quite large to you and me), but it's small compared to what they might owe if the Attorneys General had taken these cases all the way to trial, where there would be no guarantee of success—certainly not for years down the line.

Should people be pissed? This isn’t nothing—it’s still a victory for the masses. The banks are facing plenty of other lawsuits about shady practices leading up to the financial crisis, from packaging bad loans into sketchy investments to defrauding borrowers on the ground. This deal will have some positive affect on the economy—more money in people’s pockets, whether through reduced debt or a check, is always good—but it’s not that much in the grand scheme of things. It may increase people’s confidence in the still-stagnant housing market, one of the main things holding back our economy today.

So the work’s not done. It never is. One of the reasons critics are skeptical is that banks frequently flout settlement agreements designed to force them to help troubled borrowers. While there are differences between this agreement and past efforts, the real test of this settlement will be whether or not the money actually gets into people’s hands. All of the rest of those investigations into bank practices will continue, and looming over everything is the reality that we still have a pretty dysfunctional housing market in need of substantial reform.

So, it took nearly every law enforcement officials in the country to squeeze a big-to-us, small-to-them penalty payment from banks who behaved badly during the crisis. Some homeowners will get relief, but there’s plenty more to be done.

Photo via (cc) Flickr user respres

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