The American Interest
Analysis by Walter Russell Mead & Staff
Banks Settle Bubble Lawsuits for $20 Billion

The scandal surrounding pre-recession banking industry practices continues to unfold. According to the FT, U.S. banks reached settlements over past fraud and abuse that will cost them more than $20 billion. Bank of America will pay Fannie Mae $11.6 billion in reparation for the bad loans it sold to the mortgage company, and it also joins nine other bank lenders that will together pay $8 billion to settle claims that they broke rules when taking the houses of defaulting debtors.

The settlements show, if any more evidence was needed, that prior to the crash the whole banking industry had gone off the rails, and that nobody seemed to notice until terrible damage had already been done. What happened? In part, the banks themselves are to blame. Their pre-crash behavior is an incredible example of how financial bonanzas can often sideline ethics. The banks got so caught up in their excitement over the booming housing market that they clearly failed to pay attention to the nuts and bolts of their core business, resorting to gross abuses like robosigning. It was an atmosphere in which phrases like “liar loans” were widely accepted as descriptions of perfectly normal and acceptable business practice.

But the banks are not the only culprits here. The regulators and government entities like Fannie Mae that are now suing the banks shouldn’t be let off the hook either. How asleep at the switch could regulators have been as major bank after major bank went off the rails? And Fannie Mae was much more than an innocent victim in the tragedy. Could all this have been happening so long and so openly without coming to the attention of either the regulators or the government counterparties? If you believe, there’s a bridge in Brooklyn we’d like to sell you.

These settlements shouldn’t be the end of our inquiry into the banking industry failures. Much more investigation is needed to find out why Fannie Mae and regulators like the Fed were so blind. Was it greed? Bad policy guidance from politicians who deliberately subordinated the principles of sound finance to political goals? Neither the Democrats nor the Republicans on Capitol Hill really want to look closely at this horrible mess because both parties bear huge responsibilities for the ethical and legal meltdowns that accompanied the housing bubble.

Published on January 9, 2013 12:00 pm