On Friday September 2, 2011, the federal government sued 17 big banks for selling mortgage-backed securities to Fannie Mae and Freddie Mac after those securities turned toxic. This is just another example of the underling disease infecting this country.
In the 90’s, the federal government was pushing banks to make it more affordable to first-time home buyers and lower income families to qualify for a mortgage to promote their American Dream agenda of everyone in America owning a home. At first the banks pushed back and said this was a bad idea, because a good percentage of the borrowers would never be able to pay the loans back.
The federal government, in their infinite wisdom created legislation that would penalize the banks if they did not. So the banks complied and the markets roared. Now everyone with a pulse could get a mortgage. That is what the federal government wanted and the economy exploded.
But they hay days would have to end some time. And in 2006 the housing market, which was the driving force of the economy at the time start to show signs of weakness. However, since the market was conditioned for the status quo, they just kept on trucking. And the few people who saw the pending destruction were demonized by the federal government and the media, so nothing was done to even slow down the inevitable train wreck.
Then in 2008, the markets crashed and the housing market has been in a free fall ever since. So the same people that were forced to write those loans that went bad were now labeled predatory lenders and were prosecuted for there involvement. No, I am not blind. Yes there were a few that took advantage of people and even committed fraud, and those people were dealt with, but most of the lenders were only doing what they were trained to do per the federal governments legislation to promote the American Dream agenda of everyone in America owning a home.
In 2008 the feds passed TARP (Toxic Asset Recovery Program) to bail out the banks for the mess the federal government created. Will they ever admit that they created the problem? Publicly they will not, but the passage of TARP was in my opinion an admission of guilt because they had to clean up their own mess.
Now 3 years later when most of the TARP funds to the banks have been repaid and they are earning record profits, the federal government has decided to sue them, as if it was their fault. I think this will back fire on the federal government as evidence comes to the front line.
But the bigger question here is why would the federal government do something like this at this time in our history? Sure the banks are not lending right now so their cash reserves are building, and I think that is why the feds brought this action right now. There are a lot of political reason I believe this is happening, but I don’t want to get into that right now. What I want to get into is the financial implications of a suit like this at this time. First of all, in 2008/2009 the federal regulators tightened up the banks regulations and increased their required cash reserves before they could lend again. Secondly, many of the larger banks are shoring up their cash reserves so that when the real estate markets bottom out and start increasing in values, then the banks can start lending with their own cash, rather than having to follow federal guidelines in order to resell their loans to Fannie Mae and Freddie Mac.