Mortgage system is rife with conflict
10:48a ET September 2, 2011 (MarketWatch)
NEW YORK (MarketWatch) -- The federal lawsuit against major issuers of mortgage bonds seems like a stab at justice, but, by punishing banks and shareholders, the government is attacking its own policies.
The Federal Housing Finance Agency, the chief regulators of the government-run home loan programs, is expected to file a lawsuit against at least 12 U.S. banks over mortgage securities that soured and led to significant losses. Read full story on prospective U.S. lawsuit against major banks.
But one only needs to witness the effect on bank stocks in early trading Friday to see the damage. Shares of Citigroup Inc. , Bank of America Corp. , J.P. Morgan Chase & Co. and Deutsche Bank AG tumbled between 3.9% and 6.5%, joining a dismal U.S. jobs report in driving down the S&P 500 by 1.6%.
The problems with such a lawsuit are clear.
For one, shareholders, not management, most often are made to pay for institutional mistakes.
Secondly, the unprecedented bailout of U.S. financial institutions in 2008 created a quasi-nationalization of the financial system. Even though the vast majority of banks have repaid the government, the bailouts established a compact between government and finance. It explicitly implied that the role of these banks was vital to the nation.
Simply put, banking is government, and government is banking.
Finally, and more importantly, the threat of tens of billions of dollars in potential penalties will create an overhang for the U.S. banking system. It's this industry that Congress and the White House have urged to provide credit to lead the nation out of recession, create jobs and support the housing market.
So, as much as it may satisfy some in Washington and on Main Street to go after the big banks, it doesn't change the fact that their interests are aligned. Any settlement will potentially be a self-inflicted wound to the housing market and the economy.
AI
