A Dangerous War Against U.S. Banks

Capital: Washington's $30 billion shakedown suit against already weak banks is a dangerous move. It could push some banks off a cliff only to have to bail them out all over again.

The Federal Housing Finance Agency on Friday sued 17 big banks to recover as much as $30 billion in losses from subprime securities owned by Fannie Mae and Freddie Mac. Financial stocks are under pressure. Investors worry the industry faces a long slog of litigation due to toxic loans.

Banks already have been hit by class-action lawsuits over subprime securities. Adding to woes, states are negotiating a deal in their own shakedown of Bank of America, JPMorgan and Citigroup and others. They want them to pay at least $20 billion to help bail out homeowners facing foreclosure. Many of the attorneys general have been working with Obama officials.

Democrat Rep. Barney Frank of the House banking panel wants to stick banks with all the bills from the crisis he and other affordable-housing zealots helped cause. "I don't mean to demonize," Franks said, "but Goldman Sachs and Wells Fargo and Bank of America and Citicorp and Morgan Stanley and the large hedge funds can pay for this."

But $30 billion here, $20 billion there adds up to real money. Private lawsuits already have taken their toll on the nation's largest bank, which is hemorrhaging losses after settling claims. BofA stock has plunged, requiring a $5 billion infusion from investor Warren Buffett.

Banks at the same time are being sued for discrimination. As IBD first reported, Attorney General Eric Holder has launched a witch hunt against community banks for failing to market mortgages in blighted areas, including ones outside their federally designated lending areas. It's an egregious abuse of his authority. And it's sending a chill throughout the banking industry.

Community banks already are under pressure from the Dodd-Frank Act. The American Bankers Association expects the regulatory juggernaut will run as many as 1,000 small banks out of business.

Smaller banks aren't the only ones targeted by Holder and his diversity cops. Wells Fargo is also said to be in settlement talks over a lending bias suit. Holder is coordinating efforts with the Consumer Financial Protection Bureau, the new bank watchdog agency created by Dodd-Frank that has power to enforce fair-lending laws. It's planning its own assault on banks.

Few are rushing to banks' defense, who were successfully demonized by Democrats and the media elite as the crisis culprits. But if anyone should be sued for subprime losses it's the government, which pushed banks into risky subprime lending.

By law, Fannie and Freddie were required by HUD to back loans to lower-income and minority borrowers. The private-label securities they bought from Wall Street banks were counted toward those "affordable housing" goals.

In fact, government accounted for more than two-thirds of the 27 million junk mortgages that crippled the financial system in 2008, whether by virtue of being held or guaranteed by federally chartered Fannie and Freddie or held by FHA or lenders under the requirements of the Community Reinvestment Act and HUD. Private-label issuers were responsible for less than a third of them.

The war on banks is not only dangerous, it's also misplaced. And the anti-bank pile-on could crush the goose that lends the golden egg.