After rescuing the financial system from disaster, it now appears that the Federal government, in the person of the Federal Reserve Bank of New York, wishes to take it all back.

The NY Federal Reserve Bank recently joined a lawsuit against Bank of America, one of the biggest beneficiaries of Tarp funds,  to force them to buy back soured mortgage bonds it holds on its books as a result of its assist in the rescue of Bear Stearns, from Bloomberg:

The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., joined a bondholder group including Pacific Investment Management Co. that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities, people familiar with the matter said this week.

Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down almost 5 percent in the last two days, wiping out $5.92 billion of its market value. The decline runs counter to the Fed’s goal of strengthening the banking system after the worst crisis since the Great Depression.

How does that saying go–a house divided against itself can’t stand?  What in the world is this Fed bank doing?  With one hand, the Treasury (of which the Fed and its member banks are a part) provides funds to rescue insolvent banks.  With the other, it tries to take it all back.  WTF?  And why just Bank of America?  Is it because BoA is one of the few national lenders not based in New York and therefore not represented on the board of the NY Federal Reserve Bank?  In a curious twist, BofA owns 36% of one of the firms, Blackrock, that is suing it along with the NY Fed.  BofA acquired its stake in Blackrock when it purchase Merrill Lynch with federal assistance during the financial crisis.   I guess their 36% ownership stake counts for nothing.  If Blackrock wins in its suit, will BofA only have to pay 64% of the award?  Things just get curiouser and curiouser.

Where’s Obama? Why have a president if he can’t even set priorities for his own executive branch? 

But that isn’t all.  The Wall Street Journal reports that the Federal Housing Financing Agency, regulator for Fannie and Freddie, the two government-sponsored enterprises now in government conservatorship, has announced that it will be seeking to force buy-backs of loans sold to Fannie and Freddie from banks and other originators.  Fannie and Freddie, at one time considered quasi-private, now have an unlimited credit line at the Treasury.  They can lose money every single day (and have, for about 13 quarters and counting) and it doesn’t matter (unless Treasury runs out of paper and ink).  

The US Treasury spent billions rescuing the US financial system from failure, in particular, rescuing several of the firms identified by the FHFA as having had their records subpoenaed (e.g., Chase and Bank of America).  Now it wishes to use the vehicle of  breached agreements between the GSE’s and their vendors to take it all back?  In order that Fannie and Freddie don’t lose so much money?  So that instead, the entities losing the money will be the banks?    So that the Treasury can bail them out again?  Curiouser indeed. 

Should all this even matter to the ultimate loser of money, i.e., the taxpayer?  Except that each time the blame is shifted there are transactions costs associated with the shift, the taxpayer shouldn’t care.  He’s on the hook for financial system bailouts and GSE bailouts and bank bailouts already.  A blame shift only means that a few lawyers get a bit richer for the trouble.  So far as the taxpayer is concerned, the blame game is all sound and fury signifying nothing. 

But it does make the government and its leaders look a bit foolish.