NY AG right to balk at bank deal

New York's attorney general, Eric Schneiderman, is making a lot of powerful people mad by resisting a national settlement of allegations that big banks illegally foreclosed on homes through a hasty process derisively known as "robo-signing."

Good for him. The settlement under discussion is said to be as large as $20 billion, but that's less than the cash bonuses paid last year on Wall Street -- a paltry sum against the harm caused, and surely too little to buy immunity from more trouble over the banks' suspicious role in the near-meltdown of the global financial system.

Schneiderman is bent on investigating the banks' role in the mortgage securities that were at the heart of the crisis, but he has angered his fellow state attorneys general over how to resolve allegations of shoddy foreclosure paperwork used by banks in their role as mortgage servicers. After the AGs investigated, the banks entered negotiations to settle by paying billions and agreeing to stricter foreclosure standards, in return for protection from further legal action. Most attorneys general want a settlement, as does the Obama administration. The money could help distressed homeowners, and Washington may be more worried about propping up the banks than punishing them.

But Schneiderman doesn't want to settle until he's had a chance to investigate possible bank wrongdoing in the run-up to the financial crisis of 2008. And he believes the settlement being contemplated would grant the banks such broad absolution that it would blunt his probe.

There's a sharp difference of opinion on just how much protection the banks would get, but Schneiderman deserves the benefit of the doubt. He knows better than anyone where his investigation is going and whether the proposed settlement would hinder it. Besides, somebody has to investigate whether the nation's largest financial institutions broke the law when they stuffed all those dubious mortgages into bonds for sale to investors.

Did Wall Street know many of the mortgages were ticking time bombs, unworthy of the AAA certification granted by the rating agencies? Were the mortgages even properly securitized? Or did banks use the same kind of shortcuts employed in their haste to foreclose?

For New York's attorney general, foregoing a settlement to delve into all this could be amply rewarding, but it's also quite risky. Law enforcement agencies haven't had much success against the banks or their executives. And Schneiderman's approach could backfire if New York and a handful of supporting states are left out of an agreement, only to discover in the end that they can't make a larger case.

But if Schneiderman finds anything seriously amiss, it could give him a giant hammer to hold over the financial institutions that precipitated our current economic mess. Far from facing charges, they've mainly benefitted from taxpayer bailouts, which is one reason people are so furious at them. In probing robo-signing, the attorneys general didn't get at the possibility of much greater wrongdoing, and Washington hasn't been aggressive. So the job has fallen to New York's top cop.

He should stick with it -- and stand tall against any possible agreement that could slam the door on justice. hN