Burning down the house

by State of Mind

by. Henry Meier

Call me wacky, but I don’t think a convicted arsonist should be able to collect insurance for burning down his house.

If you agree, you’ll understand why I am a little uneasy about an announcement last evening of a settlement of more than $9 billion between Bank of America (BoA) and the Federal Housing Finance Administration (FHFA).  This puts to bed claims that Countrywide and Merrill Lynch duped Fannie Mae and Freddie Mac into purchasing mortgage-backed securities that crashed, causing billions of dollars in losses and contributing to the eventual bankruptcy of the GSE’s.

I’m a bit more impressed, however, by a related announcement.  New York’s Attorney General Eric Schneiderman was able to get former BoA CEO Ken Lewis to contribute $10 million to a settlement of claims that BoA deceived shareholders as part of the bank’s efforts to acquire the aforementioned Merrill Lynch and Countrywide. The AG’s settlement represents the first that I am aware of in which a CEO is taking personal responsibility for his actions during the mortgage crisis.  What a concept!  Lewis also accepted a three-year ban from serving as an officer or director of any public company.

Let’s take a trip down memory lane.  As late as 2008, Fannie and Freddie were private corporations that specialized in buying mortgages and packaging them as mortgage-backed securities.  Many of our largest private banks, including Countrywide and Merrill Lynch, also purchased mortgages from banks and credit unions and packaged them as so-called private label securities for sale in the secondary market.

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