The $16.65 billion settlement by Bank of America over financial-crisis-era mortgage securities “highlights a pattern of the government extorting the banks,” Dick Kovacevich said on CNBC this week. Mr. Kovacevich is the former Wells Fargo chairman and CEO. I’ve known him for years. He ran a great bank. He kept Wells Fargo clean during the credit meltdown. And unusual for a big-bank CEO, he strongly supports free-market principles.
Mr. Kovacevich went on to say, “It’s definitely politics. It has nothing to do with justice or restitution to the innocent victims. In fact, more of the money is going to the coffers of the states and various departments than the victims.” He then concluded, “Why are we charging the stockholders instead of going after the people who did wrong? Corporations don’t engage in criminal behavior. People do.”
Mr. Kovacevich is right on target. These huge bank settlements are election-year ATMs for the Obama administration. It was $12 billion for JP Morgan, another $7 billion for Citigroup, and on and on. It’s a real shakedown.
In fact, no one even remotely knows how these penalty-payment numbers are calculated. And the federal government’s disbursement of these funds is equally mysterious. As the Wall Street Journal editorial page has pointed out, a lot of money has gone to states run by Democratic governors. Yup.
In the $7 billion Citibank settlement, there’s a section explaining how $2.5 billion goes to “community reinvestment and neighborhood stabilization.” What’s that mean?
All this sounds suspiciously like the housing version of the ACORN electioneering operations. In other words, community organizers. In other words, left-wing groups who had absolutely nothing to do with the credit crisis.
But this shakedown isn’t isolated to banks. In spirit, it extends to all businesses. It’s the Team Obama way.
A few days before the Bank of America settlement, The Hill ran a story on how the White House’s midterm strategy is going to revolve around “economic populism and so-called economic patriotism.” That’s interesting. Democratic strategist Jamal Simmons said, “There is still a great amount of discomfort in the American electorate around the economy, and particularly anger with Wall Street and corporate chieftains.”
Out campaigning in Texas last month, Mr. Obama said, “Let’s rally around an economic patriotism, which says, instead of giving more tax breaks to millionaires, let’s give tax breaks to working families to help pay for child care or college.”
He went on to add, “Instead of protecting tax loopholes that let corporations keep their profits overseas, let’s put some of that money to work right here in the United States rebuilding America.”
Of course, Mr. Obama is talking about big companies reincorporating into low-tax countries, a process called inversion. Mr. Obama calls it loopholes. Shareholders call it after-tax returns on investment. The United States has the highest corporate tax rate in the developed world. We are completely uncompetitive, and corporations are always looking for ways to save money.
Why should companies be double-taxed on money they earn in the U.S. and the money they earn overseas? No other country does that. It’s a huge penalty. These firms don’t even have to reincorporate. They can just keep their foreign sales revenues overseas to avoid the double-tax.
But the solution is not to call them names. Or question their patriotism. Or attack “rich people” and “fat-cat bankers.” Or tell America, “You didn’t build it.” The solution is to reform the corporate tax code by slashing the rate to 20 percent. Or better yet, abolish the corporate tax altogether. The biggest winners, by the way, would be wage earners.
So what does all this have to do with billion-dollar bank penalties? Everything. The timing is more than coincidental.
Badly behind in the polls, Team Obama is resorting to its old left-wing populist tricks.
Now, I strongly believe that individuals who broke the law and deliberately wrote bad mortgage securities should be punished. But as Dick Kovacevich argued, corporations are different from individuals. So bust the individuals. Don’t crush investors. And finally end Too Big to Fail.
Nobody should forget that Bank of America purchased Countrywide and then Merrill Lynch at the behest of the Federal Reserve and the Treasury. Former Treasury man Hank Paulson threatened to fire then-Bank of America CEO Ken Lewis if he didn’t buy Merrill. And Fed officials wanted to close the Fed’s lending facility to Countrywide. So Bank of America did Uncle Sam a favor, and then got slammed for it.
And now, in the saddest of ironies, the Obama administration is again loosening credit standards for “affordable” home purchases and expanding Fannie Mae and Freddie Mac. This is incredibly stupid. The same mistakes are being made.
But it’s all part of Mr. Obama’s election-year strategy. Blame it all on the big boys. Pull out the class-envy cards. Rekindle divisive resentments and anger.
Now the question is: How will the Republicans respond?
Lawrence Kudlow is CNBC’s senior contributor.