“Please also don’t look for an analysis of how and why the fine was calculated because it doesn’t seem to exist. For all we can tell the lawyers made it up…

…The BofA extortion continues the Administration’s second-term campaign to appease its populist left by punishing banks one by one. The left is upset that Mr. Holder couldn’t find enough bankers to indict for actual crimes, despite five years of tireless effort. Maybe that’s because they didn’t commit any crimes. Instead like everyone else, bankers were swept away in a classic financial mania that super-easy Federal Reserve policy, Fannie and Freddie guarantees, and affordable housing policies did so much to promote…… But we are banking in a time of cholera, and so Mr. Holder has been demanding that CEOs bow down and write big checks. In a Dodd-Frank world in which all banks are public utilities, no CEO can afford to disagree publicly with the government, much less resist a settlement. See J.P. Morgan CEO Jamie Dimon for details. So pay up, and hear the politicians roar.”, “Banking in a Time of Cholera”, Wall Street Journal

 

REVIEW & OUTLOOK

Banking in a Time of Cholera

Bank of America pays $16.65 billion for doing the feds a favor.

Aug. 21, 2014 7:34 p.m. ET

America fancies itself a nation of laws, but you can forgive Bank of America shareholders if they have some doubts this week. They might be better off under the prehistoric appeasement the natives practiced in ” King Kong. ” Maybe during every full moon they should roll out into the street someone who worked at its Countrywide Financial unit as a legal sacrifice to the giant beast known as the U.S. government. The monster could grab the poor sap in its paw, beat its chest, and retreat back into the jungle.

As a matter of justice, such a system makes no less sense than the arbitrary, invented $16.65 billion settlement that the Justice Department imposed on BofA on Thursday. “The largest such settlement on record,” bragged Attorney General Eric Holder, as if justice is measured by dollars paid.

The better way to understand this settlement is as Bank of America’s punishment for having been foolish enough to buy Countrywide and Merrill Lynch during the financial panic. On Thursday Justice issued a 30-page “statement of facts” concerning BofA’s alleged sins when issuing flawed mortgage-backed securities. But only a page and a quarter concerned mortgage securities issued by Bank of America before its acquisitions of the two flawed firms. The rest concerned Countrywide and Merrill.

To put that in monetary terms, from 2004-2008 Bank of America, Merrill and Countrywide issued some $965 billion in mortgage securities. Nearly three-fourths of those were from Countrywide, the subprime mortgage factory that was the intimate business partner of Fannie Mae and Freddie Mac. The government mortgage giants were only too happy to buy or guarantee the subprime loans that Countrywide churned out because it helped them meet their political “affordable housing” goals.

Of that $965 billion in mortgage securities, about $245 billion have either defaulted or qualified as seriously delinquent. But only some $9 billion, or 4%, of those bad securities were issued by Bank of America itself. The rest were issued by Countrywide and Merrill before BofA acquired them.

The irony is that during the crisis the feds were delighted that a bank with reservoirs of private capital was willing to rescue the two firms from bankruptcy. As we’ve previously documented (“No Good Rescue Goes Unpunished,” Aug. 8), BofA spared the Treasury or Federal Reserve from having to intervene and perhaps write a big taxpayer check. In the case of Merrill, Treasury Secretary Hank Paulson threatened to fire then-CEO Ken Lewis when he later tried to back out of the deal.

For that public service, BofA will now be relieved of about nine months of its net income. The message for rational CEOs is that, come the next crisis, steer as far as possible from Treasury invitations to buy a failing company. The real purchase price will be what you pay at the time plus whatever the feds decide you should pay down the road if the politics of retribution demands it.

The Justice Department claims only $5 billion of the fine is a formal “civil penalty” and $7 billion will go to unspecified “consumer relief.” The latter requires special legal conjuring because the victims who were harmed by the alleged BofA fraud are the investors who bought the securities. Yet the relief will presumably go to the very mortgage borrowers whose failure to stay current on their loans caused the losses to those investors.

Please also don’t look for an analysis of how and why the fine was calculated because it doesn’t seem to exist. For all we can tell the lawyers made it up. That includes the $300 million that will be divided among the six states that are parties to the settlement. No doubt it’s merely a coincidence that all six—California, New York, Illinois, Delaware, Maryland and Kentucky—have Democratic attorneys general.

The BofA extortion continues the Administration’s second-term campaign to appease its populist left by punishing banks one by one. The left is upset that Mr. Holder couldn’t find enough bankers to indict for actual crimes, despite five years of tireless effort. Maybe that’s because they didn’t commit any crimes. Instead like everyone else, bankers were swept away in a classic financial mania that super-easy Federal Reserve policy, Fannie and Freddie guarantees, and affordable housing policies did so much to promote. Bankers were bad risk managers, like their regulators.

But we are banking in a time of cholera, and so Mr. Holder has been demanding that CEOs bow down and write big checks. In a Dodd-Frank world in which all banks are public utilities, no CEO can afford to disagree publicly with the government, much less resist a settlement. See J.P. Morgan CEO Jamie Dimon for details. So pay up, and hear the politicians roar.

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved

Posted on August 22, 2014, in Postings. Bookmark the permalink. Leave a comment.

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