After months of barely-concealed conflict, the Obama administration and New York Attorney General Eric Schneiderman say they will work closely together to investigate the role of big banks in causing the mortgage crisis.
On Thursday, President Barack Obama named Schneiderman co-chair of the new Unit to Investigate Mortgage Origination and Securitization Abuses. This group will expand investigations into abusive lending and risky mortgages. It will also include officials from the Securities and Exchange Commission and the Department of Justice.
Underlining the sudden about-face, Schneiderman appeared at the State of the Union Address Tuesday night, seated one row behind first lady Michelle Obama.
"Of all the AG's involved in this mix right now, he is the one with the power to make things happen, and President Obama recognized that," said Chris Whalen, an investment banker with Tangent Capital Partners, who also writes frequently about mortgage banking.
Whalen said in Schneiderman's first year in office, the attorney general used New York's powerful Martin Act to investigate banks’ role in the financial crisis, and that got Obama's attention. The Martin Act offers the AG broad investigative powers, and requires a lower standard of proof than national fraud statutes.
"He holds the hammer," Whalen said.
But the move is baffling to others.
"I have to say I'm a little puzzled by it," said Neil Barofsky, a senior fellow at New York University school of Law, and a former Special Inspector General for the Troubled Asset Relief Program (TARP).
Barofsky noted the Obama administration already created an Interagency Financial Fraud Task Force in 2009. Both the SEC and the Justice Department have brought cases against large banks relating to the mortgage market, such as a suit settled by Goldman Sachs in 2010 over Goldman's failure to fully disclose to investors the way it selected mortgages included in the financial products they were sold. Goldman paid $550 million to end the suit.
"Of course it's a good thing to take a second look and to perhaps use some of the more flexible state laws to look to see if there is criminal conduct and to bring those people to justice. But with that said this reeks a lot more of political opportunism than a new chapter in the investigation of financial fraud,” Barofsky said.
The banking industry is also expressing bewilderment.
In an email, Bob Davis, executive vice resident of the American Bankers Association, said, “since the administration has proposed several variations of these types of enforcement bodies in the past, we want to better understand what the difference is between the Financial Fraud Enforcement Task Force and the other efforts with AGs.”
Those efforts include a multi-state negotiation with five large mortgage servicers, led by Iowa Attorney General Tom Miller, and backed by Obama. For over a year, Miller has sought an agreement that would include a requirement that servicers consider troubled borrowers for loan modification before foreclosing on them. Schneiderman left the negotiating table last August.
Alys Cohen of the National Consumer Law Center hopes Schneiderman’s rapprochement with the Obama administration will lead him to rejoin Miller’s effort.
"What we hope is that the new unit will be able to proceed with securities claims, and homeowners will be able to get their due now," Cohen said.