FHA Sues Banks: Bad Timing?

Articles:
Wall Street Journal, U.S. Sues Big Banks Over Home Mortgages, Nick Timiraos, Robin Sidel, Ruth Simon
The Economist, Fannie Mae and Freddie Mac: Self Harm

The Economist notes that the two U.S. Government Sponsored entities, FNMA (Fannie Mae) and FHLMC (Freddie Mac) which have a mandate to encourage home ownership in the U.S., mainly by guaranteeing mortgages, have received around $140 billion from U.S. taxpayers.

Their regulator, the Federal Housing Finance Authority (FHFA) has said that they are legally required to conserve assets and protect taxpayers from further losses.  In this spirit, apparently, they have filed suit against 17 banks, for failing to adequately disclose the risks of $196 billion in mortgages which they sold to Fannie and Freddie during the housing bubble.

There may be some sense of justice here.  The banks made a lot of money during the boom (and paid out huge bonuses) by loosening credit standards and making all manner of risky loans.  Why should taxpayers have to shoulder losses when the banks are still around to pay out?

But the problem is, it's bad for the economy.  The banks are in bad shape now, especially Bank of America, which recently received $5 billion in capital from Warren Buffett.  The last thing they need now is a huge open-ended liability coming from the federal government.  The Bush and Obama administrations made a conscious decision that the best way forward out of the recession was to keep the banks alive, recapitalize them and prop them up.  Now the Obama administration is kicking them when they're down.   As a result, they can be expected to re-trench and cut back on risky lending, which will slow the economy further.

I'm not sure if the President approved these lawsuits because of populist political considerations, or if it is just an example of the left hand not knowing what the right hand is doing.  But if the goal is to strengthen the economy and create jobs, it sure looks counterproductive to me.

Its easy to criticize the decision to prop up the existing Wall Street system that was made a couple of years ago.  But that was the decision that was made, and we can't have it both ways.  Wall Street can't be the savior and the villain at the same time.

Here is the picture (again from The Economist) that tells 1,000 words: