Frank recently praised Bank of America chairman (now ex-chairman) Ken Lewis for acting in "the public interest" for caving in to bribes and threats from former Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke regarding B of A's takeover of Merrill Lynch.
Lewis wanted to back out the deal last year when he discovered the massive scope of Merrill's losses. But Paulson and Bernanke decided that Merrill shouldn't fail, so they bribed Lewis with $20 billion of taxpayer funds, instructed him to conceal the agreement from his shareholders, and told him his job would be on the line if he didn't play ball -- which he did.
These sordid details have come to light in an investigation being conducted by New York State Attorney General Andrew Cuomo.
So if such behavior is what Barney Frank calls economic patriotism, what might constitute subversive behavior?
When Congress moved last year to politically engineer changes in terms of existing mortgages in the name of bailing out distressed homeowners, Bill Frey, who manages a fund that holds mortgage-backed securities, protested.
Frey told the New York Times, "Any investor in mortgage-backed securities has a right to insist that their contract be enforced."
Contracts? Private property? That's the old capitalism.
Frank fired off a letter to Frey saying he was "outraged...that you are actively opposing our efforts to achieve diminution in foreclosures by voluntary efforts." Frank then clarified his idea of "voluntary" by summoning Frey to testify in Washington, noting that "if this cannot be arranged on a voluntary basis, then we will pursue further steps."
The House has passed legislation, which is now in the Senate, containing Frank's idea of "diminution in foreclosures by voluntary efforts." It amounts to -- what a surprise -- taxpayer funded bribes to abrogate existing mortgage contracts and provisions for legal protection for doing so.
Frey and others managing funds for investors holding billions in mortgage-backed securities are fighting back. We're not talking Bernie Madoff here. We're talking about funds that have invested in these securities on behalf of pension funds and 401Ks.
Financial institutions -- banks like B of A and Wells Fargo -- originate mortgages and then sell them off to be sliced and diced up into bonds that individual investors can purchase. This financial innovation has been a boon for providing capital and liquidity to our mortgage markets.
The originating bank, however, stays in the picture to service the loan, collecting and processing the payments. Contractual agreements exist between the bank and the bondholders that this will be done in good faith, according to the terms of the original mortgage.
For a host of reasons, mostly massive government meddling and social engineering, the mortgage market exploded and thus, we've got homeowners who can't make payments.
The House passed bill proposes to bail these folks out by paying banks servicing the mortgages $1000 for each one they re-finance, cutting interest rates and payments. Those who actually own the loans -- the bondholders -- are left out to pasture. And, the bill protects servicing banks from lawsuits to which they would normally be exposed for breaking their contracts.
So taxpayers will subsidize banks to refinance the bad loans they originated but no longer own, homeowners who borrowed beyond their means get bailed out, and investors -- the bondholders -- are left to bear the costs. On top of this, many of these same banks originated second mortgages on these same homes. The second mortgages, which the banks still own, bear even higher interest rates because they are allegedly more risky. Yet, they will be left secure and undisturbed.
Aside from the costs that our society will bear as law and contracts no longer have meaning, Frey rightly points out that it all will just make future mortgage borrowing more expensive. Who will take risks to lend when politicians can change contracts at the drop of a hat?
Welcome to the new capitalism. Where politicians rule, irresponsible behavior is rewarded, and theft is legal.