“HE’S EITHER IN ON IT OR HE’S AN IDIOT; EITHER WAY, I HAVE TO LET HIM GO.”

9/4/11

We learned on Friday that the Federal Home Financing Agency (“FHFA”) is suing 17 of the world’s largest financial institutions on behalf of Fannie Mae and Freddie Mac, now wards of the state overseen by the FHFA. The basis of the lawsuits is that these financial institutions sold $196 billion of risky home loans to Fannie and Freddie without adequately disclosing the risks involved. The presumption behind these suits must be that the political hacks, lackeys, and toadies who constituted Fannie’s and Freddie’s management were mere babes in the woods, hornswoggled by crafty Wall Street types who preyed upon their ingenuousness at every turn. There may be something to at least the first section of that argument, but that is not the point of this post.

Though I haven’t heard or seen this assertion being made elsewhere, I am quite confident that I am not the first person who has made the following point:

The amounts we are talking about are staggering, even in these days of $1.3 trillion budget deficits and a surfeit of funny money designed to somehow jump start the productive engines of this country. For example, the suit involves $57.4 billion of loans from Bank of America, $33 billion from J.P. Morgan Chase, and $30.4 billion from RBS Securities, to name a few. The ultimate settlements of these suits, be it in cash or, more likely, in the form of these banks’ doing things that will mollify the bureaucrats and help in the reelection efforts of our public servants, such as, say, allowing people to stay in homes they couldn’t afford in the first place even under the best of conditions or giving foreclosed homes to people whose familiarity with their local Congressmen and the “political process” is far stronger than their familiarity with work, are likely to be large enough to devastate, or at least impair, the capital bases of these banks. And what will happen when these banks, their capitalizations weakened by the settlements demanded by the preening poltroons who govern us, get into trouble, as is likely in our weak and apparently deteriorating economy? You, Mr. and Mrs. Taxpayer, will bail them out. The government (you, really, or Obsequious Ben Bernanke and the Washingtonians) will provide the money to keep the banks afloat, a provision made necessary by the banks’ being forced to provide the government money, or, more likely, to provide money and services to those the political system favors. So what these suits will effectively amount to is either the government suing itself or the government transferring money to constituencies who would never have been able to tap the Treasury had their pleas been subject to the normal political process.

The government’s suing itself is thus either incredibly idiotic or incredibly Machiavellian. But what else is new?