Monday, December 26, 2016

Barack’s Last Bank Bash

Former villains are now victims in a final round of official larceny.


By Review & Outlook
The Wall Street Journal
December 27, 2016

The Obama Justice Department is pulling up to the ATM for one last withdrawal from banks. Having blamed U.S. financial firms for the 2008 mortgage crisis and squeezed them for more than $100 billion in settlements, the feds are now gashing foreign banks. Cases against such unsympathetic targets are sure to please progressives, but don’t expect the feds to prove any of these cases in court.

Last week Credit Suisse agreed to fork over more than $5 billion and Deutsche Bank agreed to pay more than $7 billion. Barclays refused to settle and was sued by Justice on Thursday. Good for Barclays.

Here’s hoping the British bank takes its case to trial, because Justice’s complaint is a 198-page flight from logic. The government’s lawsuit accuses Barclays of defrauding investors who bought its mortgage-backed securities in the years leading up to the financial crisis. The allegation is that the bank didn’t disclose how bad the underlying loans were. But the government acknowledges in its complaint that Barclays was also an investor in most of the securities at issue, and that it was often buying some of the riskiest slices of the deal. Was Barclays defrauding itself?

The suit goes downhill from there. The statute of limitations has run out for bringing a typical case under securities law. But the government is still able to sue Barclays under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Firrea).

Prosecutors like this law because it requires a low burden of proof and can result in huge penalties. The catch, since Firrea was created to punish savings-and-loan executives, is that it can only be used against those who have allegedly harmed a federally insured financial institution. So instead of presenting mom-and-pop investors who lost money, prosecutors have to present other banks as victims and describe how they allegedly suffered at the hands of the defendant.

For the purposes of extracting cash from Barclays, guess who the government is now calling a victim? Yes, Citibank.

For those who don’t appreciate the humor in this Beltway scam, recall that two years ago the feds used Firrea to claim that during the run-up to the same financial crisis the bank’s parent Citigroup was the villain that had misled investors in mortgage-backed securities. Justice extracted a $7 billion settlement from Citi.

In announcing that deal, then Attorney General Eric Holder called Citi’s conduct “egregious.” Mr. Holder said the bank had “contributed mightily to the financial crisis that devastated our economy” and spoke of shattered lives allegedly caused by the villainous firm. But that was so 2014.

Now we are asked to believe that this mastermind of an international plot to defraud investors was simultaneously taken in by a nearly identical plot cooked up by a rival rogue organization. Amazing. Will Citi now get some of its $7 billion back to reflect its new victim status?

There’s more. The government says Barclays had many other institutional victims, such as Fannie Mae and Freddie Mac. Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, had to acknowledge the destruction caused by these reckless “kings of leverage.” But lately the government finds them more useful as alleged victims when suing other firms.

Another alleged victim in the civil case against Barclays is IndyMac, the California liar-loan factory that used to brag about all the “nontraditional” mortgages it was originating before failing in 2008. According to Justice, IndyMac is now a victim not because it bought mortgage-backed securities from Barclays, but because it sold to Barclays lots of risky loans that were bundled into securities. Justice claims that Barclays harmed IndyMac by “creating demand” for its products. Were IndyMac executives powerless to offer anything but poorly underwritten mortgages?

Justice seems to be saying that shoddy products are the responsibility of the consumers who order them. It might be entertaining to watch government attorneys try to argue this point in court. Carried to its conclusion, this suggests that President Obama’s beloved Consumer Financial Protection Bureau has been protecting the wrong side of a financial transaction.

The worst financial abuses are these bank raids by the Obama Department of Justice. Repairing this agency and its reputation begins with an end to evidence-free money grabs against unpopular defendants.


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