Incriminating Banks for Compliance

Bank of America Sign

It seems that the Department of Justice is still going after banks over the economic policy disaster we know as the financial crisis. Attorney General Holder apparently intends on riding the populism train as far as it will take him to “punish” those evil corporations, errr, I mean “banks” that defrauded the American public (though they’ve yet to explain how making a bunch of terrible loans with a low expectation of repayment could be categorized as “greed” or “fraud”.) Despite this, DOJ is still pursuing banks under the charge of “mortgage fraud”.

However, to those of us with an IQ above room temperature, this doesn’t make sense. Unless Mr. Holder is keeping his most incriminating evidence a secret, all the facts tend to point in another direction, not at the banks. Perhaps our Attorney General, in his infinite wisdom, can explain the following:

  • It was the Federal Government that essentially created the subprime mortgage with the Community Reinvestment Act of 1977. This law required banks to loan money to people that didn’t meet conventional lending criteria thus, the “subprime” designation.
  • It was the Federal Government that monopolized the secondary mortgage markets with Fannie Mae and Freddie Mac, dramatically limiting the options for banks.
  • It was the Federal Government that in effect created the “mortgage backed security” as a vehicle for Fannie and Freddie to resell their mortgage portfolios.
  • It was the Federal Government that mandated how much of Fannie and Freddie’s mortgage purchases had to be subprime loans, essentially setting the ratio of subprime loans issued by banks. (Interestingly, this ratio was increased from under 20% to over 50% between 1992 and 2000. That’s right, under Clinton, not Bush.)
  • It was the Federal Government that expanded the CRA in 1995 and used regulators to “enforce” the lending provisions requiring banks to loan money to people who didn’t qualify for it. (Again, under Clinton, not Bush.)
  • It was the Federal Government that for decades has pushed the “dual mandate”, essentially requiring the Federal Reserve to use interest rates to ensure a stable currency and full employment (an economic Pandora’s box if there ever was one). This created the artifcially low interest rates that fueled the housing bubble (and many more).

It’s no surprise that this all collapsed but how exactly does this constitute “mortgage fraud” by the banks? Did banks force anyone to borrow money? Did they hide the terms of the loans from the borrowers? Did they pull some kind of complex bait and switch that would fool even the smartest among us? The answer to all of those is a resounding NO. People knowingly and willingly borrowed money and need to take responsibility for their actions instead trying to blame the very institutions that made it possible for them to do so.

In terms of the market collapse, everything we’ve seen happen is the direct and cumulative effect of bad government policy over the last 35+ years. The end results were entirely predictable when you have a government that attempts to micromanage the economy. It wasn’t the first time and it won’t be the last (student loans are probably the next to fall, but not being a psychic, I won’t try to make a prediction). The banks aren’t entirely innocent mind you, as they certainly took advantage of the federally backed mortgage train but again, complying with the law, no matter how misguided it may be, is not a crime.


+Kevin A. Nye

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