The Foreclosure Lawsuits Show Why Everybody Hates Bailouts

The Obama administration will have a tough time keeping the banking system stable without angering the Americans people

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For politicians in Washington, doing the right thing can be hard: sometimes it isn't even clear what is meant by "the right thing." Although elected representatives are put in power to carry out what their constituents want, what happens if policymakers know that the action being called for will result in more harm than good? Right now, the Obama administration finds itself in such a pickle. Will it choose anger to Americans and go easy on the banks despite their foreclosure misdeeds for the sake of financial stability?

The Foreclosuregate Dilemma

As you probably know, the state attorneys general in conjunction with the Justice Department have sued a number of big banks in conjunction with their allegedly flawed foreclosure practices. This case must end in a settlement, because it's a logistical nightmare to deal with each mortgage lawsuit separately. To create a settlement, however, the states, the federal government, and the banks all have to come to an agreement. That is proving to be a challenge.

At this point, the banks can be pretty sure they'll end up having to pay something. Obviously, they want to keep the amount of damages as small as possible. But perhaps more importantly, they want to ensure that their liability is limited as a part of the settlement: they don't want to face additional lawsuits in connection with these botched foreclosures.

But several state attorneys general are aggressively pursuing damages and don't want to extend this courtesy to banks. They believe banks have harmed a large number of people through flawed procedures and want the banks to pay for their mistakes. Many Americans agree.

The Obama administration may agree too. Unfortunately, its decision to go after the banks isn't as simple as it sounds: a painful settlement for banks could endanger financial stability. So does the administration push for an aggressive settlement or go easy for the sake of the U.S. economy?

Really, this is a no-win situation for the administration. Americans will not be pleased if banks get off with a little tap on the behind. They want justice. The president's progressive base feels particularly strongly about the need to make banks pay. Politico reports that the left is outraged that the administration is said to be pushing for a milder settlement. So going too easy might alienate voters.

In the meantime unemployment is 9.1%. A great deal of uncertainty continues to plague the banking industry due to its foreclosure problems. Providing a limit to their liability here could go a long way in calming investors that at least one aspect of legal action is behind the banks. To make matters worse, a banking crisis may be brewing in Europe, which could spread to the U.S. Now is probably not the best time to beat down the banks.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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