Not again. (photo: wallyg/flickr)

During the many months over which we read excellent posts from David Dayen, Yves Smith and others about the on/off negotiations between state Attorneys General, the Administration and the five major banks, I assumed, and I suspect many others also believed, that the settlement negotiations were essentially a law enforcement matter. Thus, any settlement should be judged on principles relating to fairness and criminal justice. It now appears that that interpretation was fundamentally inaccurate.

Instead, it’s becoming more apparent that the Administration always viewed this not primarily as law enforcement but rather as a means to promote its efforts to help the housing market and the economy, even if only a bit. Law enforcement was at best a secondary consideration, if it mattered at all. That misunderstanding explains much of the angst the still unspecified settlement terms are causing.

During that time, we read story after story about private lawsuits uncovering evidence of massive fraud, forgeries, perjury in court filings, and evasions of recording fees by lenders and their servicers. State AGs thus had every reason to suspect the banks had knowingly violated the law in perhaps millions of instances. As Bill Black would note, we were witnessing a massive crime spree that called for a massive law enforcement action.

In the absence of official collusion or corruption (see Florida), it seemed logical to expect the AG joint effort to focus on suing and prosecuting the banks and their servicers, seeking criminal and civil penalties and restitution for the crimes they had committed. But apparently, the Obama Administration had a very different agenda.

David Dayen alluded to this other agenda in this post, in which he discussed how the settlement will apparently allow the banks to count any mortgage principal reductions they agree to under the Administration’s HAMP program towards meeting the principal reduction requirement in the settlement. And by the way, much credit is due to Dayen and his sources for spotting this double credit scheme a week before the story went large in the Financial Times.

Note the angry reactions reported in the first FT story from experts who assumed the settlement is supposed to be about law enforcement and are shocked to find that government subsidies will help induce the banks to offer principal reductions that count against the settlement requirement.

The disconnect, however, springs from the fact the Administration misled everyone. It did not see the settlement primarily in terms of law enforcement. It wasn’t about justice, or punishment, or restitution or of any of that. So the dollars at stake didn’t need to match those needs.

The Administration had an embarrassingly failed HAMP program that needed to be rescued. That failure was also hurting the economy. The President had promised millions of mortgages would see principal reductions under HAMP, and he’d secured billions in TARP funds to bribe the banks into offering them to home owners . . . yet HAMP was still failing to accomplish much.

What the Administration needed, in addition to larger bribes, was a hammer, and the settlement negotiations gave them one. By pretending the state AG effort was about law enforcement, and the settlement dollars would be at least partial restitution and in lieu of possible prosecutions, the Administration saw a way to use the settlement to convince the banks to offer more principal reductions, make HAMP work better, and thus address the private housing debt problem.

If you look at this as strictly an economic and political matter, if makes sense the Administration would seize upon the settlement negotiations as a way to reduce private debt. After all, deleveraging of private sector debt is likely necessary before consumer spending can play its customary role in driving the economy. Moreover, the Administration already had the money, some $40 billion or so from TARP, that it could use without further approval from the irresponsible crazies in Congress.

The problem was, the banks weren’t anxious to agree to massive principal reductions, because that would expose their own positions, so the money just sat there. The Administration needed both bigger bribes and a stick to induce the banks to accept them. Recent tripling in the government incentive payments for principal reductions provided the extra bribes, and the settlement process offered them the stick.

If the Administration had simply told the truth about what it was doing, we might have been able to evaluate the economic and political merits of this dual approach. The objective might be viewed as having merit, and a carrot and stick approach could make sense. Now the details are immune from input while buried in a multi-party settlement. We might even have seen NY AG Schneiderman’s willingness to co-lead a claimed enforcement task force, though limited In scope, in a different light.

But once again, the Administration has played bait and switch with the public, just to produce a deleveraging scheme that barely scratches the surface, while reminding its critics that its commitment to the Constitution’s law enforcement responsibilities — the duty to see that the laws are faithfully executed — is sorely lacking.