Federal regulators launched a broad legal assault on big banks Friday, claiming they sold nearly $200 billion in fraudulent mortgage investments to housing giants Fannie Mae and Freddie Mac that led to massive losses during the financial crisis.
According to the court filings, those firms and others “falsely represented” the quality of the loans that were bundled into securities and sold to investors and “significantly overstated the ability of the borrower to repay their mortgage loans.” The result, the suits claim, were investments that were far riskier than the banks led taxypayer-backed [sic] Fannie and Freddie to believe, and the securities ultimately were worth a fraction of their original value.
“AHAH! We told you so. It was the free market that caused the financial meltdown, after all.” This is sure to be the rallying cry of statists from coast to coast. In fact, this case proves just the opposite. It points up the culpability of government and the dangers inherent in a mixed economy.
It’s fitting that the sub-heading of the Post website that published the aforementioned article is “Where Washington and Business Intersect”. That intersection is exactly the culprit.
Leaving aside for now the fundamental American principle of justice, “guilty until proven innocent”, let’s assume the banks did in fact fraudulently misrepresent the loans. The first question that comes to mind is; How could fraud on so massive a scale have happened in the first place? Fraudsters have always existed at the fringes of every walk of life. How did they suddenly acquire the power to bring an entire world financial system to the brink of ruin? There is only one possible answer – government interference into the market.
For an in-depth look at the financial crises, peruse the links provided below or my previous articles on the sub-prime mortgage crisis. But, here is a brief encapsulation.
Clinton/Bush/Congress affordable housing crusades “encouraged” banks to lower lending standards through regulatory pressure and mandates. The Fed provided unlimited amounts of ultra-cheap liquidity. Government Sponsored Enterprises Fannie and Freddie, at the behest of politicians, bought up as many sub-prime mortgages that banks could originate. As noted in the article, they are taxpayer-supported. The bundled securities Fannie and Freddie pioneered were given AAA ratings by S&P, Moody’s, and Fitch - the government licensed, competition-protected rating agency cartel. Taxpayer-backed government mortgage guarantees and implied government bailout promises for “too-big-to-fail” institutions bestowed by politicians blessed the whole charade. Responsible lenders were disadvantaged in a politically corrupted marketplace, in favor of the quick-buck artists. The government created a conveyor belt of bad lending.
Only government force could have spread bad loans across the entire system. Now the government is using its prosecutorial authority to cover its own butt and support the politicians’ sinister attempts to switch the primary blame to a non-existent “free market”. It is the mother of all conflicts-of-interest. Nominally private banks face a civil suit by an institution that has massive regulatory power and can thus face regulatory reprisals; that has the arbitrary, predatory power of the antitrust laws and can thus face malicious prosecution; that has taxing powers, and thus face the constant threat of vengeful IRS audits: that has congress, with its posturing politicians and their investigatory and subpoena powers. The banks don’t stand a chance of a vigorously fair fight while their officers face the threat of political imprisonment and financial ruin – especially those with the weakest political connections.
The danger should be obvious. A government’s proper role in the sphere of civil dispute is to mediate; to be an impartial, objective arbiter between private parties who battle it out on the level playing field of the court system. But what happens when that allegedly objective arbiter is deeply entangled in the private economic sphere, as it is today in the financial system (and to varying degrees in all economic sectors)? When a private party is wronged by private fraud or breech of contract, it can turn to the government, whose sole responsibility is to protect everyone’s individual rights. What happens when your protector is the violator of your rights? To whom can you then turn? You have nowhere to turn, which means you are subject to the pressure of all manner of subtle, no-so-subtle, or even implied threats of reprisals from any number of governmental sources. Whether the banks are guilty or innocent, they are on anything but a level objective playing field.
This all reminds us to consider the answer to the age-old question: “Who will protect us from our protectors?” The point is not whether or not fraud was committed. It is not a matter of letting anyone off the hook. If fraud was committed, prosecutions are in order. It’s not even whether or not fraud was committed on so massive a scale as this suit implies; a likelihood that stretches the limits of one’s imagination, to put it mildly. The point is that if your protector is also the other party in the civil dispute, it’s no different than if you are accused of theft and the accuser is also the police chief, prosecutor, and judge – and refuses to recuse himself.
Never mind that the Federal Housing Finance Agency is separate from Fannie Mae and Freddie Mac. They are all arms of the government, in one capacity or another, as are all of the government agencies that have some kind of authority over the private sector. They all ultimately come under the purview of the same politicians. The stench of political corruption is heavy. There is no way to know what complex interactions of political influence peddling is working behind the scenes. The article itself hints at this insidious process:
FHFA is an independent regulator, theoretically insulated from political influence in much the same way as the Federal Reserve. Still, the agency has been under pressure recently from the Obama administration, which has sought new measures to boost the weak housing market. Those ideas include a generous refinancing program that lets struggling borrowers get new mortgages at existing low rates.
Can anyone really say that the Federal Reserve is anything more than theoretically independent? Can any agency that owes its very existence to congress - that depends on congressional funding, confirmation hearings of its officials, legal monopoly guarantees, or congressionally bestowed taxpayer backing - be said to be truly independent? On what basis are we to believe that FHFA was not pressured by Obama or anyone else to file this lawsuit? And even if FHFA acted honorably and objectively in filing suit, that does not preclude pressure being applied to the defendants from other political players with a vested interest in the outcome being a guilty verdict.
The answer to all of these questions is, we will never know whether everything was on the up-and-up, because the conflicts of interest inherent in the mixing of economics – the sphere of voluntary contract - and law enforcement – the sphere of legalized physical force – are irresolvable.
The saga of the housing boom and bust is still unfolding. When the final chapter is written into the history books, the result is likely to be quite different from the history of the Great Depression. For decades, the Depression was blamed on the failure of the free market, and only very recently has that myth begun to unravel. Today, free market forces are armed with 70 additional years of theory, history, and experience. The incipient and corruptive nature of government interference is much better understood. In this very article, the reference to “taxypayer-backed Fannie and Freddie” speaks volumes about the government’s role in the crisis. This suit is just further evidence that the primary cause of the financial crisis was government interference. It could never have happened under laissez-faire capitalism. We need to close down the intersection of Washington and business, and instead phase in the separation of economics and state.
Rating Agencies? Still Subprime
ARC’s Response to the Financial Crisis
The Financial Crisis: Causes and Possible Cures
The Housing Boom and Bust
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