Negotiations for Settlement With Banks Set to Begin Wednesday Despite Disagreements

By Kyle Chezum Updated on 3/28/2011

The day has almost arrived.  The nation's five largest banks, Citigroup, Bank of America, JP Morgan Chase, Ally Financial, and Wells Fargo, are meeting with state attorneys general in Washington in this Wednesday to begin negotiations.  With any luck, the banks and the investigators will reach a swift settlement in which damages are made up for, financial burdens are lessened in the name of economic stimulation, and fairness reigns supreme.  This may just be pie in the sky.

The negotiations are unlikely to be swift, first of all.  And there is still significant disagreement even among the attorneys general as to the desired outcome of the talks.  Much of the debate, at least the portion that has been heavily covered in the media, centers around the question of whether or not banks should provide widespread, wholesale mortgage principal deductions to underwater homeowners.  This has long been a favored position of the attorneys general, but a few have, in recent days, brought this idea into question, saying it may create a moral hazard that rewards the act of defaulting.

Iowa Attorney General Tom Miller, the leader fo the investigation and a strong advocate for the mortgage principal deduction solution, claims the terms that will be presented to the banks on Wednesday don't include broad, sweeping mortgage deductions, though he agrees that this could be beneficial. instead, he says, banks will likely be asked to use this tool more often and more consistently.

Banks, for their part, are worried that there may not be a fair way to implement such changes.  If one underwater homeowner receives a deduction but not another, public outcry will likely result.  Miller reassured the public and bank leaders that the investigative team does not hold the position that every underwater homeowner should receive help of this kind.  Time will tell what shape this mandate will take.