Finally, A Bank Stands Up To Obama's Shakedown

Editorial Cartoon by Mike Keefe 3/11/2010
Taxpayers Still Being Taken Advantage 5 Years Later

IBD Editorial: Exortation: After 16 banks caved in to White House demands to refund billions in losses to Fannie Mae and Freddie Mac, one outlier remains unrepentant. Nomura Holdings refuses to succumb to the political shakedown.

The Japanese bank's U.S. unit won't give in to the extortionist regulators protecting Fannie and Freddie who claim it hoodwinked the toxic twins into buying pools of subprime mortgages, like it claimed Bank of America, JPMorgan and other U.S. banks did in the run-up to the mortgage crisis.

The government demands $1 billion in damages. Nomura says it won't give a dime toward the $18 billion ransom the feds already have shaken out of other banks who settled with the Federal Housing Finance Agency. Instead, it will make government prove it in court.

In opening arguments this week, the defendants argued Fannie and Freddie bought the mortgages knowing they were subprime and did so to meet "affordable housing" quotas of their political masters at HUD.

Unfortunately for Nomura, the game is rigged. The federal judge hearing the case — Clinton appointee Denise Cote — is a ringer for the administration.

In recent filings, Cote has shown extreme prejudice in her decisions — virtually all rendered against Nomura.

Even though she concedes that, in buying subprime securities from Nomura, "Freddie Mac considered the extent to which the underlying mortgage loans satisfied these housing goals," Cote claims such evidence is "immaterial" to the case. She argues the regulatory mandates, purchasing quotas and other political pressures heaped on Fannie and Freddie were merely "idiosyncratic" and therefore irrelevant.

Please. The HUD goals are highly relevant to this case. Internal documents from both HUD and Fannie and Freddie show the goals were driving them deeper into the subprime securities market and both complained about a growing risk of losses. So clearly, they understood the risks. There was no "misrepresentation."

And if they failed to perform the proper due diligence, it's because it wouldn't have mattered — they had to buy risky subprime securities to meet HUD quotas for loans to low-income borrowers with bad credit. They were culpable in the recklessness, and therefore culpable in the losses they suffered when those loans defaulted. Nomura shouldn't be on the hook for those losses.

In its defense, Nomura plans to call former Fannie and Freddie officials, including former Fannie CEO Daniel Mudd, to testify about how it was Fannie and Freddie who on orders from HUD lowered underwriting standards, not Nomura.

According to former Financial Crisis Inquiry Commission member Peter Wallison's "Hidden in Plain Sight," Mudd wrote to a top HUD official in 2007: "In 2006 Fannie Mae relaxed certain underwriting standards and purchased some higher risk mortgage loan products in an effort to meet the housing goals. The company continued to purchase higher risk loans into 2007, and believes these efforts to acquire goals-rich loans are partially responsible for increasing credit losses."

So Nomura didn't sell them fraudulently sub-standard loans from 2005 to 2007; Fannie and Freddie had already lowered standards to find more goals-qualifying loans in that riskier market.

Portraying the largest, most sophisticated players in the mortgage market as rubes or victims is laughable. Fannie and Freddie knew what they were buying. They have only themselves — and their regulators — to blame.

Even now, Fannie warns investors of the "risk factors" associated with its housing goals, which are now enforced by FHFA.

"The potential penalties for failure to comply with housing plan requirements include a cease-and-desist order and civil money penalties," it reported in its Dec. 31 10-K filing. "As described in 'Risk Factors,' actions we may take to meet our housing goals may increase our credit losses and credit-related expense."

Cote is expected to rule against Nomura sometime next month. When she does, the administration no doubt will trumpet it as proof Fannie and Freddie were steered into subprime waters by greedy Wall Street bankers and not their politically driven regulators.

Don't buy it. It's part of the ongoing cover-up of government's role in the financial crisis.

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