The Oddest Revelation From the Bank of America Fraud Suit

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By Jonathan Weil

There is something very weird about the civil complaint the Justice Department filed this week against Bank of America Corp. for allegedly defrauding Fannie Mae and Freddie Mac.

Prosecutors are suing under a statute called the False Claims Act, which imposes liability on those who defraud the federal government. Curiously, the suit is seeking damages for acts that Countrywide Financial Corp. committed before Fannie and Freddie were seized by the government -- back when U.S. officials were adamant that Fannie and Freddie didn’t have any implicit government guarantee. (Bank of America bought Countrywide in July 2008.)

Perhaps the Justice Department has a sound case on the merits anyway; the lawsuit alleges violations of a different federal law as well. Still, I can’t help but wonder if this is how the False Claims Act was intended to be used.

The Justice Department’s complaint alleges that from 2007 through 2009 –- pay close attention to those years -- Countrywide implemented a new mortgage-origination process it called the “Hustle.” The complaint says the program generated thousands of fraudulent loans that were sold to Fannie and Freddie and later defaulted, causing the companies more than $1 billion in losses.

Fannie and Freddie were placed into government conservatorship in September 2008. Until then, the government’s position was that Fannie and Freddie were for-profit, private-sector, shareholder-owned corporations -– and most definitely not part of the government.

During testimony before Congress in 2003, then-Treasury Secretary John Snow explicitly denied there was any implicit government guarantee of Fannie or Freddie: “We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee,” he said. “We need to be on guard against this perception. It is a perception. It is not, in our view, a reality.”

Here’s a quote from U.S. Representative Barney Frank, one of the companies’ most vocal supporters in Congress, in 2003: “There is no guarantee. There's no explicit guarantee. There's no implicit guarantee. There's no wink-and-nod guarantee. Invest and you're on your own.”

Of course, now we’re being asked to believe that Countrywide was defrauding the government in 2007 and early 2008 when it was ripping off Fannie and Freddie -- in spite of the government's vehement insistence that Fannie and Freddie weren’t backed by the government in any way.

The wheels of justice grind strangely.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Oct/26/2012 18:53 GMT