The Triumph of American Cronyism

PARIS – Volkswagen CEO “falls on his sword,” reports the Financial Times.

The FT was speaking metaphorically, of course. Martin Winterkorn is German, after all, not Japanese.

A Japanese businessman in a similar circumstance would have his intestines on the floor by now.

An Innocent Crime?

A $100-Billion Fraud

Yesterday also brought news of another corporate faux pas…

This time, by one of America’s government-sponsored mortgage giants, Fannie Mae.

The case also involved hiding something. But this time, the result was genuine suffering on behalf of millions of U.S. homeowners.

Fortune magazine reports:

On Monday afternoon, Thomas Lund [one of the highest ranking former officials of Fannie Mae] settled charges brought by the Securities and Exchange Commission back in 2011 that he helped deceive shareholders of Fannie Mae in the run-up to the financial crisis.

The suit claimed that Lund, who was the head of Fannie’s single-family division, helped hide more than $100 billion of subprime exposure from Fannie’s shareholders, allowing it to continue to back more and more risky loans.

Now, here we have a clearer case. Thanks in part to Mr. Lund’s chicanery, the bubble in mortgage finance caught investors unaware. This resulted in losses of at least $8 trillion in the U.S. stock market alone.

Mortgage debt had become a key component of Wall Street collateral. When housing prices fell, many of the big banks were faced with insolvency.

Arguably, in September 2008, this brought the entire financial industry – and the world economy – to the edge of collapse.

Losses in the housing market were colossal and came with great personal suffering. We don’t remember the number. But something like 10 million households found themselves “underwater,” with mortgage debt in excess of the value of their houses.

Millions of people lost their homes when lenders repossessed them.

Remember “jingle mail”?

Underwater homeowners had no choice: They just mailed their house keys back to the mortgage companies. Whole families were living in cheap motels and improvised lodgings.

You’d think Mr. Lund would want to duck. Surely, the SEC – when it ruled this week – would throw the book at him.

But wait. Mr. Lund was in finance, not manufacturing. He was not making cars. He was not making anything!

He was taking cheap money that didn’t belong to him (thanks to the Fed’s EZ money policies) and lending it to people who couldn’t pay it back.

Thomas Lund’s Parting Gift…

So, when Mr. Lund looked up at the judge on Monday… and said, “Judge, what will be my fine?”… the judge didn’t look at Mr. Lund and say, “Boy, you got 99.”

Instead, Fortune continues:

Lund’s penalty for his role: a mere $10,000. What’s more, the penalty won’t even be considered a fine. The SEC agreed to classify the payment officially as a “gift to the U.S. government,” not an actual punishment.

But the worst part is this: Lund won’t even pay the penalty. The agreement allows Fannie to make the payment for him, which it has agreed to do. And don’t forget: The government had to bail out Fannie and still controls it.

Of course, Lund was not a German industrialist. He was a true American crony.

Reprinted with permission from Bonner & Partners.