Given the Federal Reserve’s abysmal regulatory record in the runup to the crisis (even the uber bank friendly Office of the Comptroller of the Currency was more aggressive in going after subprime abuses, for instance), it should be no surprise that some of its directors are utterly lacking in propriety and common sense when it comes to defending the rights of banks to profit at the expense of customers and society at large.

The only good news about the latest example is that it was so ineptly done that it appears to be backfiring.

By way of quick summary, Bank of America entered into what is widely referred to as an $8.5 billion settlement. That would give it a broad waiver from suits by investors in the trusts that are covered by this pact, which represent virtually all of the Countrywide securitizations. The release goes well beyond the so-called representation and warranty liability, which resulted from the fact that Countrywide promised to put loans that met certain quality standards into their deals but instead put in quite a few dodgy loans. It also includes chain of title issues, which is a huge gimmie for Bank of America. Not only is the $8.5 billion amount arguably way too low just for the rep and warranty issue (AIG filed a $10 billion suit for bond issues representing a mere 6.6% of the total), but it is a screaming bargain by virtue of covering the potentially even bigger chain of title sinkhole.

Where this all gets squirrely is that BofA didn’t ink this deal with investors. The trustee on these deals, Bank of New York, is the one that agreed to the settlement. It conferred with only 22 investors, but some (like the New York Fed, Goldman Sachs, Pimco, and Blackrock) might prefer making the mortgage mess go away to maximizing their return on investment.

The settlement is subject to court approval, and a number of objections have already been filed. The biggest bombshell, as we discussed, came from New York attorney general Eric Schneiderman (although a later one by Delaware AG Beau Biden was no party either). The Schneiderman motion didn’t merely challenge the adequacy of the settlement, but it also took aim at Bank of New York. Schneiderman alleged that BoNY had engaged in fraud. First, it failed to preform its duty to investors by getting a very valuable indemnification, which we had characterized from the very outset as a bribe from BofA . Second, BoNY failed to perform required duties and tell investors that loans were defaulting. Third, BoNY made false certifications to investors regarding whether it held the collateral as stipulated in the pooling and servicing agreements, which is a violation of New York securities laws.

The third allegation, the false certifications, is a biggie and we’ve discussed it on the blog before. Frankly, we’ve been stunned no one has gone after till now, since this is as close as you ever get to a slam dunk in the litigation arena. The legal argument is simple and the facts, that is, proving that the trustee made false certifications, is remarkably easy (just look at the difficulties the banks have in proving chain of title when challenged for starters). Abigail Field in Fortune Magazine found a complete fail in Countrywide securitizations it examined in two New York counties. A probe by the New York Post published Sunday today found a 92% chain of title failure rate in Chapter 13 filings it examined in two Federal court districts in New York state. Not surprisingly, this issue was the centerpiece of the Delaware filing objecting to the settlement.

So what in the way of wounded noises do we get from the Bank of New York camp? Get a load of this, from Alison Frankel at Reuters:

A BNY Mellon spokesman told me the bank didn’t want to comment on the broader implications of the AG’s filing, but directed me to Kathryn Wylde, CEO of the Partnership for New York City, a business development non-profit. She said that the AG’s “careless action” hurts New York’s standing as a financial center. “It’s disappointing from the standpoint of the business community that the AG would make a fraud accusation against a major financial institution — in the press,” she told me. “And to not have any consultation with the institution? The bank was blindsided by what appears to be an outrageous charge.”

“Fraud accusation…in the press”? This woman evidently has reading comprehension problems. If she had bothered to go through any of the news reports on the motion, the charges were not made in “the press”, they were made via a court filing.

She was quoted in Crain’s as accusing Schneiderman of “grandstanding”, which suggests seeking media attention. It’s meant to imply Schneiderman is another Spitzer in the making (Spitzer was big on trying his cases in the press) when Schneiderman has done the opposite. He’s studiously avoided press appearances even when he is filing big cases.

And no, Bank of New York was not entitled to “consultation” when it is about to be accused of fraud, particular when the facts and law are as clear as they are in this instance. Her argument indicates either abject ignorance or deliberate deceit.

But what is even more disturbing than her disregard for the most basic facts is the underlying logic: that it’s perfectly OK to break the law if you make enough money at it to create employment. As David Dayen notes incredulously:

[S]he is actually arguing that Schneiderman, by defending the rights of investors and seeking the truth on out and out securitization fraud, is threatening the existence of the financial sector in New York City. No, really… The banks must continue looting, the story goes, or they’ll stop creating jobs in Manhattan.

If you accept that logic, it takes you some interesting places. Andrew Haldane of the Bank of England has already told us what inefficient looters the bank really are. His analysis concluded that the cost that the big banks imposed on the global economy in th financial crisis was so great that even if you spread a low estimate of the costs out over 20 years, the first year charge would wipe them out. Since I believe members of the Mafia make less money on average than Wall Street employees, they are more efficient looters, and Wylde ought to be promoting them too.

Of course, what Wylde blithely ignores that this looting is a wealth transfer. Those jobs created on the back of fraud are at the expense of mortgage bond investors, who are in the end ordinary citizens, and homeowners, who are certain to suffer from an overshoot of housing to the downside thanks to chain of title issues deterring buyers of foreclosed homes, and vacancies depressing prices of neighboring properties. The destruction of consumer balance sheets is having a far greater impact on employment in the New York area and nationwide than can even remotely be justified by the comparatively few jobs created in the mortgage finance and RMBS trustee businesses of the too big to fail banks.

That brings us to the most interesting question: who is this Kathryn Wylde? The organization she heads, the Partnership for New York City, is an influential group. She ranked 11 on a 2009 list of New York City’s most powerful women.

But the defense of BoNY is sheer cronyism. This isn’t even subtle. Bank of New York is one of the “partner companies” of the New York Partnership, which is its biggest ticket donor group. That tier also includes other parties who want the BofA settlement to go through: BofA itself, Blackrock, Goldman Sachs, ING. If you look at the various partner lists, you can see it is full of other firms that would like the mortgage mess to go away, such as securitization law firm SNR Denton (whose white paper last November trying to defend industry practices is looking like more and more of an embarrassment) and Wells Fargo Conveniently, the BoNY in-house flack R. Jeep Bryant is a Rockefeller Fellow at the Partnership , which no doubt made it even easier for him to make the call to Wylde.

Finally, Wylde is closely allied with governor Andrew Cuomo, who protected the banks when he was attorney general. The Wall Street Journal today describes the friction between Schneiderman and Cuomo. Schneiderman was opposed by a lot of the banking industry, including Bloomberg, whose firm is yet another major sponsor of the New York City Partnership.

Wylde was appointed to fill ex Goldman Sachs co-chairman Steve Friedman’s unexpired term as a Class C director of the New York Fed and was reappointed at the end of 2010. Class A directors represent the banking industry, Class B directors represent consumers. Class C directors, per the Federal Reserve Act, are tasked to consider the interests of the public at large, to give “due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers.”

Not only does Wylde appear to be derelict in her duties as a Class C director in shilling publicly for her paymasters at the Partnership for New York City, but one has to wonder if her appointment was properly vetted. Class C directors have had a nasty history of acting as banking industry stooges, when the Federal Reserve Act is also explicit that Class C directors may not be a “officer, director, employee, or stockholder of any bank.” If she has any meaningful net worth, it is highly doubtful that she does not own bank shares.

In one sense, the fact that Bank of New York could trot out only a near-captive mouthpiece who gave a pathetic defense of its position is confirmation of how serious its woes are. But this incident also serves as a case study of how quick the elites are to circle the wagons when their conduct is subject to well deserved scrutiny.