California’s behavior today is reminiscent of the course charted by South Carolina in the nullification crisis of 1832.
The Wall Street Journal reports that the proceeds of a multistate settlement of state lawsuits over banks’ alleged foreclosure abuses have been put to uses that have nothing to do with foreclosures, mortgages, or banks. Nearly forty percent of the states’ $2.5 billion recovery has ended up in the states’ general funds, either to plug holes in state budgets or to start new boondoggles. Three of the top ten settling states (California, Georgia, and New Jersey) have put their entire recovery to this use. California alone plunked its $410 million recovery in the general fund, where it has since disappeared.
A scandal? Not really. As multistate settlements go, the foreclosure settlement was actually a pretty good one. The defendant banks (Ally Financial, Bank of America, Citibank, JP Morgan Chase, and Wells Fargo) were permitted to pay $20 billion of the $25 billion settlement directly to distressed homeowners—not necessarily the homeowners who had allegedly been mistreated, but homeowners who are hard-up, in or near foreclosure, and thus kind of, sort of in the extended penumbra of the alleged abuses. That’s as close to mass justice and a wrong-remedy connection as one gets in these proceedings. Moreover, a big chunk of the “payments” represents the forgiveness of debts that the banks would be unlikely to collect in any event. To the extent that those “payments” help the housing markets to clear, they serve a useful function.
It’s true that the 49 settling states promised to put their $2.5 billion recovery to foreclosure avoidance, “to the extent possible.” It’s not clear, however, that this would actually make sense. California Attorney General Kamala Harris insisted, without success, on devoting the state’s recovery to counseling and legal aid for distressed homeowners. At $410 million, that implies a level of legal assistance that’s otherwise available only to the Fortune 500 and GTMO detainees. Even the California general fund may provide a higher and better use.
The real scandal is institutional, and its embedded in all multistate settlements (beginning with the 1998 settlement of tobacco litigation, the prototype and to this day the most lucrative of all such settlements). The pattern has become routine: a few state AGs initiate lawsuits, often based on exotic legal theories and containing lurid, headline-grabbing allegations that, if true, should land the executives in the slammer. That, though, isn’t the point or effect of the cases. Exceedingly few of them ever reach a courtroom, let alone a verdict, and they aren’t meant to. The point is to settle for a relative pittance—a billion here, three billion there—and to divvy it up among the states. (To preclude future liability over the same allegations, the defendants will typically insist on including all states and often the federal government in the bargain.)
This isn’t “law enforcement” in any meaningful sense; it’s a form of tax farming. It is usually impossible to identify the victims of the alleged misconduct (if indeed they exist). So the recovery ends up with the states, and there is no good use for it. Either we let the AGs use it for their own constituency-building purposes, in which case it ends up in law school clinics, non-profit advocacy organizations, legal aid outfits, and other rackets. Or else, the funds are transferred to the legislature, which then gets to fork it over to its friends. Either way, the institutional corruption runs deep. When AGs become profit centers, neither electoral nor legislative controls will check abuse. The only rational demand is, sock it to corporate evildoers. Go get us some more of that free stuff.
Respectable, honorable state AGs cannot arrest this dynamic, or even resist it. Sure, they can refuse to sign on to a settlement—but only at the price of incurring the wrath of both sides to the so-called litigation, as well as the legislature’s. All that, for zero reward. Not gonna happen. This is a genuine race to the bottom, and only one institution can stop it: the United States Congress.
Not gonna happen either.