Friday, September 2, 2011

Obama admin seeks to recover political capital from banks

Obama's biggest political mistake was to bail out the banks shortly afer he took over as US President. At the time, he was (ill-) advised that this would help the economy recover, that "bailing out Wall Street"  was critical for the recovery of Main Street. Three years down the line,
- Main Street has not recovered
- unemployment is high, and the labour participation rate dropping.
- the economy is stagnating.
Most importantly, 
- elections are around the corner.


Something, clearly, has to be done. It seems unlikely that Obama will be able to do anything substantive to push the economy over the 12 months he has left to demonstrate any progress. Time for some optics, then, to show he is not on the side of Wall Street. Hence the move to sue US Banks for the quality of mortgage-backed paper they sold to Fannie Mae and Freddie Mac, now essentially custodians of the US tax-payer.


Little matter that these two housing agencies were supposed to have been expert at evaluating mortgages; were set up expressly with the purpose of expanding the market for housing loans. Hardly babes in the woods! See the second para (below) extracted from the Financial Time's blog, ftalphaville.


Commencing this vendetta against the banks is ironic for an administration that put them in ICU when they could have been allowed to die. Worse, it creates an adversarial relationship between the government and the banks, and sets up the apprehension that other arbitrary moves could be around the corner. This will inject more instability into a financial system that is already tottering. This will end badly. Very badly


From ftalphaville:

"Since Fannie and Freddie are in government conservatorship and Royal Bank of Scotland, another target of the action, is majority-owned by the UK government, the lawsuits have produced the unusual situation of Washington suing London over crisis-era losses on $30.4bn of securities.
Banks reacted angrily to the move."

Passing the Bucks:
BofA said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities” and yet were “now seeking to hold other market participants responsible for their losses”. Deutsche Bank said the institutions were “the epitome of a sophisticated investor” and the bank would “vigorously defend against the action”.