Yes, unlike what was sold to us about Dodd Frank, there are in effect already backdoor bailouts before our very eyes if we care to look. This one involves the most important regulator of our entire financial system, the New York Fed, intervening to let Bank of America off the hook for its residential mortgage backed securities fraud.
Still, last week’s details of the undisclosed settlement between the New York Fed and Bank of America are remarkable. Not only do the filings show the New York Fed helping to thwart another institution’s fraud case against the bank, they also reveal that the New York Fed agreed to give away what may be billions of dollars in potential legal claims.
Here’s the skinny: Late last Wednesday, the New York Fed said in a court filing that in July it had released Bank of America from all legal claims arising from losses in some mortgage-backed securities the Fed received when the government bailed out the American International Group in 2008. One surprise in the filing, which was part of a case brought by A.I.G., was that the New York Fed let Bank of America off the hook even as A.I.G. was seeking to recover $7 billion in losses on those very mortgage securities.
To anyone interested in holding banks accountable for mortgage improprieties, the Fed’s actions are bewildering. If the Fed intended that Maiden Lane II own the right to sue Bank of America for fraud, why didn’t it pursue such a potentially rich claim on behalf of taxpayers? The Fed made $2.8 billion on the Maiden Lane II deal, but the recovery from Bank of America could have been much greater. Why did it instead release Bank of America from these liabilities and supply declarations that seem to support the bank in its case against A.I.G.?
What did the New York Fed get from Bank of America in this settlement? Some $43 million, it seems, from a small dispute the New York Fed had with the bank on two of the mortgage securities. At the same time, and for no compensation, it released Bank of America from all other legal claims.
In an interview, Senator Sherrod Brown, Democrat of Ohio, who serves on the Banking Committee, said the New York Fed’s behavior in this case “underscores that the more we learn about these bailouts, gifts and advantages that Wall Street gets, the clearer it becomes that one set of rules applies to the largest megabanks and another set of rules to the smaller financial institutions and the rest of the country.”
AIG got $20.8 billion for these securities with a face value of $39.2 billion so they ultimately sued BoA for 7 billion of this 18 billion loss. Yet BoA tried to pass of their liability to Maiden Lane II instead of AIG even though New York law doesn't specify that such a transfer of the right to sue for fraud automatically belongs to Maiden Lane II during these bailout proceedings. So, because of that, AIG sued the NY Fed's Maiden Lane II to get an answer on this, and then the NY Fed agreed with BoA's interpretation that Maiden Lane II was the entity with the right to sue BoA for fraud and not AIG.
However, they never did, which means the NY Fed's own structured investment vehicle for bailouts(Maiden Lane II) was never meant to truly do its job. It could have used it and recovered way more than the paltry 2.8 billion it bragged about as well as arrogant politicians bragging about a broken regulatory system. Going by this, I guess we are supposed to be happy the most important regulators in our financial system are picking winners between the elite that defrauded the public and destroyed trillions of their wealth yet never restoring underwriting standards or legal standards as a whole.
This basically means that those making excuses for Dodd Frank, TBTF, and Wall St. yelling about "no smoking gun!" with Maiden Laine II just do not know what they are talking about. Protecting the most corrupt institutions from being liable for their fraud is wasteful and costly for the public. Luckily Senator Sherrod Brown knows this per his quote above, and he's right. He tried to end all of this by ending TBTF and was making headway. That is, until the White House, particularly Treasury Secretary Geithner, whipped Congress to defeat Brown Kaufman. I always find these facts funny since we are always hearing about how powerless this WH is except for protecting the 1%.
What else I find funny but also sad is that conservative columnist George Will is now to the left of the Obama administration on ending TBTF. You didn't hear about TBTF in the SOTU did you? That means ending it is not a priority to them as they make George Will look like a progressive.
This latest escapade by the NY Fed and BoA also proves Matt Taibbi right that all of the bailouts were based on lies. There are no pseudo crapanomic fairy tales spun by some that can make the old bailouts seem awesome or the new ones. Picking criminal winners out of criminal losers while ridding them of their legal liabilities dwarfs whatever money is paid back from TARP on multiple levels.
These practices only perpetuate a culture of corruption and a loss of all ethics and morality. Despite the lies we are told, in actuality, the lack of standards really hurts real people; these same people are told to be happy about all of this because of the meager profits from TARP that can never pay back what was lost in the real economy. They have the nerve to say this; some people have the nerve to defend this being said to them. In what one can't really call a legal financial framework, TBTF banks still have the most sway. This is because of representation on the board of the NY FED which the President's "savvy" friend, Jamie Dimon, resides on.
That is a sad fact. Those that would defend the bailouts to score partisan political points despite all of this only help make these criminal robber barons whole until next time or next crime. That is another sad fact.
Why do some people defend this? I don't know. Maybe partisan war syndrome? An "I got mine" attitude? A lack of standards across the board? Our public officials get away with it because of a public bored with the lack of standards so they then disengage. In some ways I can't say that I blame them. After all, the public does have a point after all of this adding to the fact that the top 1% have received 121% of all income since 2009. They see that those in power, for the most part, do not care whether the people they are sworn to represent have any resources to live or die. Because of that, it might be hard not to wither in despair when so many do not care, but we should try and remember that some with the best hearts and minds do.
There's only one bailout and legal intervention worth pursuing, and it's for you and I. It's time to write off all of these debts people were swindled with through what the late great economist Hyman Minksy called Ponzi finance or at least give it a serious try. Yes, and in the name of economist Irving Fischer who wrote the paper on debt deflation, it's also time for economist Steve Keen's private Debt Jubilee for our nation.
Only then will we see if people are as important as bankers are to the elite in DC or if there are any legal standards left in this country the citizens will ever once again see. Right now we are not even living up to the standards of ancient Monarchs who wrote off the public's private debts in biblical times. It's past time, for the sake of morality and demand economics, to give working people relief still suffering the debt burden from TBTF bankers and their crimes.
Also chip in some money to Steve Keen's kickstarter Hyman Minsky visual modeling project if you can. This work is very important for understanding our economy, private debt, and how it really works.
Cancel the bankers' private debt overhang on the public. Let people live and breathe a sigh of relief. Doing so will support your business with their income which is your future income.