Banking Law

Last week, when Ally Financial settled with Fannie Mae over mortgage loan putback claims made by Fannie Mae, The Wall Street Journal speculated that the settlement "could shed light on how banks will resolve repurchase demands with Fannie Mae and its sibling, Freddie Mac." In that same article, reporter Nick Timiraos made an astute observation: "Given those concerns, the settlement between Ally and Fannie struck some analysts as low."

Settling a potential worst-case liability of $292 billion for $462 million is a tad "low"? Ya think?

Today's announced settlement by Bank of America with both Fannie and Freddie for a measly $2.8 billion (40% of the orinal amount claimed) was so unexpectedly favorable to BofA that it boosted its stock price by 6.3%. Stocks of some other big banks with outstanding repurchase claims by Fannie and Freddie got a similar boost on the expectation that when it comes to too-big-to-fail banks, the federal government never stops bending over and grabbing its ankles. Remember, folks, Fannie Mae and Freddie Mac are wards of the taxpayer, and every time they give up is a potential dime out of the taxpayers' pockets. 

In a Reuters opinion piece today, Christopher Whalen minced no words in calling the settlement, which, he noted, was blessed by the US Treasury Department, "a gift" to Bank of America by the federal government. Whalen thinks the dispute between Peter Walliston of the American Enterprise Institute and Joe Nocera of The New York Times about whether or not Fannie and Freddie were the primary cause of the subprime mortgage debacle (a subject we touched on recently) is "meaningless." He thinks the real focus of everyone's attention should be on a marriage made in hell: Big Banks and The Federal Government.

Liberals like my friends Nocera and Johnson still cannot believe that the government was the moved-mover in the mortgage mess, the catalyst for Wall Street?s entirely rational exuberance that merely followed Washington?s bad example. But such distinctions are meaningless. The corrupt relationship between the large TBTF banks and the federal government is long-standing and should be the focus of people on all points of the political compass.  Indeed, somebody should tell Nocera he owes Peter Wallison and AEI an apology.

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How can bankers like JPMorgan Chase CEO Jaime Dimon, who settled his own tab with Fannie and Freddie on equally attractive terms last year, complain about Barack Obama when the supposedly liberal President is so generous with public subsidies for the zombie banks? The truth of the matter is that the federal government, through agencies like Fannie, Freddie, the Federal Home Loan Banks and the FDIC, have been calling the shots in the banking industry since the 1930s.

While American banks have, from time to time, shown a certain degree of independence, this in the form of speculative lawlessness known as ?innovation,? all lenders in the U.S. are ultimately appendages of Washington. The degree of government support for the financial markets has never been greater in the history of the American republic and the largest players in the industry thereby exercise enormous political power. This is why calls from observers as disparate as Kansas City Fed President Thomas Hoenig, Vermont Senator Bernard Sanders and Dallas Fed President Richard Fisher to break up the largest banks are entirely on target.

Whalen's certainly correct that this unholy alliance needs to be "probed" (preferably by aliens from a hostile planet with bad attitudes and technologically advanced implements of torture). On the other hand, a fair and balanced approach would also take into account the roles of all of the players in the meltdown, from Wall Street to Main Street, and certainly throughout all of the nooks and crannies of our nation's capital. Breaking up the bad guys isn't a "final solution" to the problem, in my view, although it certainly has merit as one arrow in the quiver of desired actions, at least to biased observers outside The Beltway like this blogger.

Whalen's is yet another provocative viewpoint to add to your hopper of "hot opinions" as we all try to decide who and what needs to be "changed" in order to "fix" the banking system so that a financial crisis as recently occurred "never happens again." Because, of course, we're capable of changing human nature through legislation and the gentle ministrations of large bureaucracies, right?