Boy Scouts to the Rescue (?)

Treasury Secretary Geithner and I agree that Federal regulation of the banking and financial industry is warranted where it serves the general interest of all citizens in the stable functioning of a free economy. However, we should find Mr. Geithner’s defense of Dodd-Frank concerning (Wall Street Journal, Financial Crisis Amnesia, March 1, 2012).

The primary impact of Dodd-Frank is to give the Federal government leverage over the financial industry through its arbitrary and expansive language. An initial poster child for the impact of this leverage is the recently announced $25 billion settlement with five large banks over alleged processing abuses on mortgage foreclosures. Why are five major US banks agreeing to fork over $25 billion without defending themselves?

As reported by Bloomberg, it turns out the banks and the Obama administration stuck a deal whereby these banks that service about half the nation’s mortgages on behalf of investors will be able to share losses on their junior loans with bondholders and get credit toward the cash they pledged to spend in the settlement. This proportionate write-down of the first and second mortgages represents a reversal of lien priority.

So, the banks are compelled to negotiate with the administration, and then agree to a settlement that diminishes the rights of first mortgage holders by fiat. So, would you now want to own first mortgages on real estate? How would you value them given that the government can renegotiate your contract rights at will?

That Mr. Geithner defends Dodd-Frank in the Wall Street Journal with the enthusiasm and naivety of a Boy Scout seems disingenuous in the context of political reality. The lesson here is that over regulation can, has, and will corrupt the healthy and normal functioning of markets and the private economy to our detriment. Somebody please inform Mr. Geithner.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.