Last week Attorney General Eric Holder announced a “historic” settlement of $16.5 billion with Bank of America. The Justice Department had sued Bank of America along with several other lenders for alleged misdeeds during the residential real estate boom and collapse that predicated the 2008 financial meltdown.
In 2005 the housing bubble burst. Over the previous decade residential real estate prices had been driven up dramatically by an abundance of mortgage capital made available by federal redistributionist policies implemented by the Clinton administration that pressured banks into making absurd loans to high-risk borrowers.
Government-sponsored enterprises Fannie Mae and Freddie Mac purchased billions of dollars worth of these bad loans as part of a deliberate Clinton administration wealth redistribution scheme designed to recycle capital back to the originating banks so they could make even more bad loans. Fannie Mae and Freddie Mac repackaged these subprime loans as prime loans, and they were widely peddled around the financial community as complicated mortgage-backed derivatives and securities. Everyone knew these loans were under-collateralized, but the investment community perceived no risk because the loans were backed by the full faith and credit of the U.S. government.
When the housing bubble burst in 2005 and residential real estate values plummeted, it created not so much a financial crisis but a liquidity crisis due to the huge number of under-collateralized mortgages backing these financial instruments. In the middle of all this, Sen. Chuck Schumer, D-N.Y., introduced a bill allowing Fannie Mae and Freddie Mac to purchase even more bad loans. When Republicans objected, he accused them of being against affordable housing. Rep. William Clay, D-Missouri, accused Republicans of going on a “witch hunt” against Fannie Mae. Every time Republicans urged restraint, Democrats hurled charges of racism and insensitivity to the poor. In a recent interview President Clinton acknowledged that he should have paid a little more attention when Republican lawmakers raised their concerns. Even Timothy Geithner, Obama’s first treasury secretary, concluded in sworn testimony before Congress that Fannie Mae and Freddie Mac were “a big part of the problem.”
And while all of this was happening, Franklin Raines, Jamie Gorelic, Rahm Emanuel and other Clinton administration refugees warehoused at Fannie Mae and Freddie Mac were pocketing millions in bonuses.
Fast forward to the Obama administration, and we find a highly partisan Justice Department systematically going after the evil bankers. Part of the settlement deals with the targeted banks will fund the president’s Home Affordable Re-finance Program (HARP), perpetuating the redistributionist policies that created the problem in the first place.
A reasonable person might ask: If the bankers were as greedy and guilty as the president and other Democrats would have us believe, why did the Justice Department initiate civil actions rather than criminal prosecutions? The answer is simple. This isn’t law enforcement. It’s a shakedown.
T.S. “Mac” McDonnell