This is all about the difficulty of taking the punch bowl away from a roaring good party. Over the past several weeks a number of major banks folded under enormous pressure from the US DOJ to settle fraud claims resulting from the sale of bonds prior to the financial crisis of 2008. The allegations here were that, as they have been in many many cases over the past several years, the banks knowingly sold bonds backed by crappy residential mortgage loans. Apparently, no one else had a clue that this stuff was crap! Who knew? These last suite of deals were relative bargains for the banks because, reportedly, the DOJ was highly motivated to get these deals done before Mr. Trump took the helm at the White House.
For some reason this calmed investors’ concerns.
I don’t get it.
This recent flurry of settlements is merely a tell in the great card game of the Regulatory State at Play, and not a good one at that. It means our government is not giving up the punch bowl.
For a quick aside to the adults in the room, these bad bond suits have always seemed to me to fail the giggle test. These suits were never about compensating “victims” for the behavior of nefarious bankers; witness the fact that no money actually goes to the witless investors who bought damaged subprime housing bonds in the first place. Arguendo, if some small berg in Norway made a really bad deal, and again, arguendo, if they were misled by perfidious bankers, shouldn’t these guys get the dough? Oh, silly me. Let’s remember for a moment that these transactions were passed on by both buyers and sellers of the bonds, by the analysts on the street and in our banking institutions, by the rating agencies, by the prudential regulators (which allowed many banks to actually accumulate gobs of this stuff on their balance sheets), by the government through its supervision of the GSEs and by pretty much everybody else. The Big Short is so fascinating a story for the same reason we love a good car crash. It relates in a very human way how so few people figured out we were committing a species of financial suicide that is so obvious in hindsight. So don’t tell me this is about righting wrongs.
This is a story about how our government has found redistributive fulfillment in using the proceeds of these piggy bank raids to sprinkle goodies on voters and sundry fellow traveling NGOs. It ought to be shocking, but perhaps again we’ve lost our sense of wonderment over these sorts of things.
Our federal and state governments have discovered the sheer bliss of holding up regulated global enterprises with dubious and ill constructed theories of wrongdoing. Here’s the plan: an attorney general or DOJ, arm in arm with a regulator, with its largely unfettered capacity to control the destiny of highly regulated enterprises, assert that said enterprise has done us wrong. Next, try the allegations in the court of public opinion and threaten it existentially through a regulatory bear hug. The enterprise, concerned with the difficulty of mounting a robust defense against the regulator which holds its economic life in its remit, folds. Chest thumping ensues. Press conferences with serious looking politicians with visions of higher office solemnly decry the excesses of unfettered capitalism. Massive extra judicial settlements follow. Financial goodies are sprinkled across the electorate. Wash, dry, fold and repeat!
We have now tapped virtually all the big banks for all the alleged malfeasance of 2008 and we’ve even tapped the GSEs. (Don’t you love it, as The Wall Street Journal so cogently observed a few weeks ago, a bank sued on Tuesday as the villain is then cast as the alleged victim in suit on Wednesday! Even Captain Renault might have blushed.)
And now some people seem to have the view that with the last of the bad bond fraud claims largely behind us, we’re done. Ahh …no. The real lesson of this exercise is that the DOJ and the attorneys general and the regulatory apparatchiki they serve have discovered that any heavily regulated industry can be rolled. And it’s good fun!
Why would we think this is going to stop now? The political class has gotten ahold of the punch bowl and it’s not letting go. And by the way, don’t for an instant think this is limited to the financial sector. God knows no one loves a banker but with an electorate in an increasingly populist frame of mind and seeing a good chance to get in on the goodies, any powerful industry (particularly one with perfidious global wealth) feeling the heavy hand of an increasingly large and powerful regulatory state is at risk. You can already see the pharmaceutical industry getting teed up and why anyone would feel safe from this sort of capricious piggy bank smashing is beyond me.
And don’t be fooled that this doesn’t affect your business. There is no question at all that the confluence of bad outcomes for consumers… (read voters), political expediency and the punch bowl effect can mean anyone could be in the cross hairs of this sort of pocket picking. This, in a real world way, reduces innovation, reduces risk taking and at the end of the day reduces the dynamism of the U.S. economy. Rules are good, the rule of law is good. When those guardrails get squishy, the economy will suffer.
Now maybe the urge to assault the banking system and global businesses will abate. Even the dumbest regulator knows that the dead stop being easy marks. But as folks in India will tell you, tigers with a taste for villages rarely go back to eating the bunnies. It is a reasonable worry that the populist Trump administration and our various attorneys general will continue to see opportunities to supplement their budgets here. Now, one can hope that this trend just wears itself out. The anarchists, nihilists, corporalists of the late 19th century finally stopped shooting and blowing up superannuated aristocrats in the early 20th century and this period of terror has become little more than a historical footnote. So maybe this too shall pass, albeit, I note that the anarchist heyday may have stopped only because of the industrial violence of World War I, which is not terribly comforting. But I’m not taking a deep breath or taking much comfort from the fact that the government might be on temporary pause. And perhaps the Trump administration will have a more measured approach to this sort of thing. (Just don’t ask Ford, Carrier, VW, etc., etc. about their investments in Mexico.) But once the genie is out of the bottle, it is very, very hard to put it back. A cash strapped government, a bunch of politicians on the make with a fabulist’s taste for theories of legal liability proffered inside the framework of populist distaste for business, and voila! Money! Oh, yes, we’ll see this again.