Government Gone Wild: Bank Of America Settlement Will Prolong Next Financial Crisis

As you may have already heard the Department of Justice has reached a nearly $17 B settlement with Bank of America for the prior mortgage market misdeeds of two of the companies they acquired during the financial crisis – Countrywide Financial and Merrill Lynch. This sort of settlement scores a lot of points for populist politicians who are always looking to gain favorable publicity and it really satisfies the public’s demand to punish the big evil banks for losing money by giving money away. But there’s a bit more to the story.
There is no doubt that Countrywide and Merrill Lynch engaged in all sorts of shady practices prior to their acquisition that helped facilitate the financial crisis and there is no doubt that an acquiring company normally becomes responsible for the liabilities of the companies they acquired. However, it’s clear that Bank of America was pretty much forced to go through with the Merrill Lynch acquisition by a government that was desperate for a savior. There is also some evidence that they were strongly encouraged to buy Countrywide.
I can’t possibly know all the ins and outs of this legal battle but it’s not at all clear that Bank of America is strictly liable and apparently there have been numerous intermediate court decisions that absolved them of responsibility. This Wall Street Journal article provides a great summary of the issues and what transpired going back to the days of the collapse: BofA Deal With U.S. Is Hung Up Over Penalties Tied to Countrywide, Merrill.
As much as I hate Bank of America for being inept in handling my company’s financial matters this settlement just seems wrong. I think it’s obvious that the next time the government needs the private sector to bail them out of a problem they’re either going to be turned down or required to throw in all sorts of guarantees.
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