Dr. Strangelove Meets the Mortgage Crisis

Does the Justice Department have a doomsday device?

A doomsday device is a fictional weapon that has the power to destroy the world. It’s designed to prevent nuclear aggression by insuring that both sides are destroyed. In the black comedy Doctor Strangelove, the Russians have one—but don’t tell us–and it gets triggered by accident when an errant US bomber targets a Russian missile site. When it is clear the device is about to go off, an American official exclaims to the Russian ambassador, “The whole point of a Doomsday Machine is lost if you keep it a secret!”

The US Justice Department seems to have a similar approach to financial regulation. In 1989 Congress passed FIRREA, in response to the Savings and Loan crisis back then. A career prosecutor in its Los Angeles office used the law in the early ‘90s to punish small-time mortgage cheats, consistent with the law’s intent. But he disbanded the Firrea-unit when the caseload dropped.

Now Justice has revived the statute, using it to extract billions in fines and settlements: $13 billion from JP Morgan; $5 billion from rating agency Standard & Poor’s; $900 million from UBS. These huge fines and the law’s lower prosecutorial standards are supposed to have a deterrent effect—but only if someone knows about it. In S&P’s case the law may really be a doomsday machine: a $5 billion fine would destroy the company and cripple a critical part of our financial infrastructure.

Stretching a statute beyond its original intent undermines the rule of law. Using old laws in novel ways may be popular, but blowing up the financial industry is not an effective way to regulate it.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-11-06T10:54:52+00:00 November 6th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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