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

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