Laws Are For The Weak

Megan McArdle is a work of art. Behold this post, in which she guesstimizes that the Obama Administration won't prosecute mortgage fraud because they need the good will of bankers to get them to accept industry reforms.

Via Outside the Beltway, I see that the administration is pressing New York's attorney general to drop its investigation into dodgy foreclosure practices and settle with the banks.

Dodgy? I think the word McArdle is avoiding is "fraudulent." But she always did refuse to admit any acts of fraud in the financial sector.

Doug Mataconis, who wrote the post, says "I'm sure the large amount of donations coming from the financial sector into the coffers of the Democratic National Committee and Obama For America have nothing to do with this pressure. I also believe the guy who tells me he has a bridge in Brooklyn to sell me."

Once again for your viewing pleasure, the top 20 donations to Obama's election campaign:

University of California $1,648,685
Goldman Sachs $1,013,091
Harvard University $864,654
Microsoft Corp $852,167
Google Inc $814,540
JPMorgan Chase & Co $808,799
Citigroup Inc $736,771
Time Warner $624,618
Sidley Austin LLP $600,298
Stanford University $595,716
National Amusements Inc $563,798
Wilmerhale Llp $550,168
Skadden, Arps et al $543,539
Columbia University $541,002
UBS AG $532,674
IBM Corp $532,372
General Electric $529,855
US Government $517,908
Morgan Stanley $512,232
Latham & Watkins $503,295

McArdle finds it hard to believe that a company that gave hundreds of thousands of dollars to support a friendly candidate actually wants that candidate to be friendly to them. No doubt USB and Citigroup and JP Morgan just like to give away money to people with nice smiles and get nothing in return.

Mataconis also wrote:

The Attorney General of New York has been on the receiving end of what seems like an unusual amount of pressure from Obama Administration officials to accept a settlement with mortgage lender rather than pursue the criminal fraud investigation that he opened several months ago [...].

Naturally McArdle does not quote that part.

I quite agree that the administration should not be intervening, but let me suggest a more charitable explanation, contained within today's edition of the New York Times: "U.S. May Back Refinance Plan for Mortgages". It looks like the administration has convened a working group to explore more aggressive options for dealing with underwater mortgages.

And so the small matter of fraudulent mortgages is swept away, the better to discuss how the taxpayer can best compensate the bankers and mortgage brokers for their fraud and theft.

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today's lower interest rates, about 4 percent, according to two people briefed on the administration's discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along -- the administration requested ideas for execution from the private sector earlier this month.

How much these proposals will actually accomplish seems rather questionable--I doubt lowering interest rates is going to do much to fix the housing market, given how highly correlated default seems to be with a) losing your job and b) the simple fact of being underwater. But leave those concerns aside. If the administration actually wants any of these programs to work, it is going to need the cooperation of the banks.

And no, I do not mean "because they can't move without the okay of their corporate paymasters". I mean that the administration is going to need some active cooperation from the banks that hold and service all these mortgages. Corporate and social reformers tend to get caught up in the notion that with a combination of steely will and brutal intolerance of misbehavior, you can simply force all those twerps in a misbehaving organization to do what you want: the only reason people don't, they believe, is that they have somehow been paid off, or brainwashed, by the twerps.

It's like the legal system doesn't even exist for McArdle. You pass a law, you enforce the law, the bank follows the law. Putting the reality of what is actually happening aside, saying that we must get the banks to agree to follow the law voluntarily is stupid and dishonest, but propaganda usually is stupid and dishonest. In McArdle's little world, liberals are busy-body reformers who just envy and therefore hate rich people, who are successful because they are moral and work very, very hard. Therefore, liberals are driven to punish the banking class with silly, harmful rules and regulations. The government should be willing to give something up in return if they want members of the financial industry to follow the law. For instance, they should give up implementing the law, which is hard and give the banks a sad.

This is why most corporate reorganizations, and social reforms, fail miserably. Not even Stalin or Pol Pot exercised this level of total control over the workers. There are all sorts of way that unwilling people will subvert your efforts.

That's not to say that reforms should be all carrot, no stick. Indeed, sometimes the way to deal with a tricky organizational problem is to fire all the workers. But even this doesn't work as well as you might think. I once spent some time talking to an in a turnaround situation whose solution to a deeply dysfunctional corporate culture at a firm that had been losing money for more than a decade was ultimately a mass firing that axed more than 90% of the staff. Eighteen months later, I asked him whether the old culture had died out, or re-established itself among the new workers.


"Honestly?" he said, "The culture won."


You need some level of buy in; if you don't have it, your reforms won't work unless you can actually fire everyone. And a "clear the decks" approach is not an option the administration has. They cannot fire the owners of these mortgages, nor do I think they'll have much luck forcing the owners to fire their servicers. If they want to do anything serious in the mortgage market, they're going to have to have the active cooperation of the banking industry.

Because Obama refused to prosecute banking and mortgage industry fraud, Missy Megan McArdle can flounce around proclaiming that homeowners will just have to suffer so the poor, innocent financial industry can get back to the hard work of running the world. (See Glenn Greenwald also.)

And that, in turn, means that they have to trade the industry something that they want . . . like a quick settlement in this foreclosure fraud investigation. I don't know that this is the particular quid-pro-quo that led to the administration's pressure. But after three years of covering their economic policymaking, I find it eminently more plausible than the idea that they're doing this because some banker made a well-timed phone call to David Axelrod.

She knows about the revolving door between Goldman, Sachs and other firms and the government and she knows the banks are getting richer while poverty is growing, but she finds it "implausible" that any quid pro quo exists between Wall Street and the White House. She is either hopelessly naive or a lying hack. Or a hopelessly naive lying hack, take your pick.

I frequently disagree with administration policy, but however much you question their priors or analysis, it's always operated within an admirably consistent technocratic framework. The technocratic wonks are shocked because they cannot believe that this is what technocracy actually looks like in the real world: it involves a lot of side-deals to get buy in from the affected parties.

Yes, the dreaded evil Obama Chicago Machine has no idea of side-deals.

That's not to say that I approve of making this deal. I don't. But this is the sort of devil's bargain we accepted when we got the government into the business of guaranteeing mortgages. The problem is not that politicians are making the kind of distasteful backroom agreements that politicians have ever made, and ever will. The problem is that we put the government in the position where these kinds of deals are necessary.

Blame Fannie and Freddie and the poor!

A lying, simpering, scolding hack tells us to ignore theft and ignore the rule of law, because the banks must be appeased. I should have become a conservative and cashed in by screwing over the poor.

Maybe we really do live in the best of all possible times. Was it ever easier to get rich by shovelling manure down the throats of willing dupes?