Government's Latest Shakedown: $25 Billion -- Today's Outrage

NEW YORK (TheStreet) -- Jerry Garcia, late of the Grateful Dead, is probably turning in his grave.

When U.S. Attorney General Eric Holder and U.S. Housing and Urban Development Secretary Shaun Donovan announced the federal government and 49 state attorneys general reached a $25 billion agreement with the nation's five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses, something is definitely happening on Shakedown Street.

The shaken are Bank of America(BAC), JPMorgan Chase(JPM), Wells Fargo(WFC), Citigroup(C) and Ally Financial.

This nothing more than the Feds holding a gun to the head of the largest banks and telling them to empty their pockets. Yes, the banks have behaved like miscreants, or worse, but the solution to systemic fraud is not more fraud (more on that later), but rather jail time for the perpetrators. It's amazing to me that our criminal justice system will always prosecute an employee who steals from the company, but never for the company.

Worse, the philosophical underpinnings of the settlement are either off the mark or, worse, nothing more than an election-year stunt.

Here's why. Roughly $20 billion of the settlement will go to homeowners by having their mortgage debts reduced or their loans refinanced at a lower interest rate. Since when does the government have the power to tell private enterprise to rewrite the terms of some 1 million mortgage contracts, simply because the buyers overpaid or because economic trends turned against them? In almost any private transaction, when one party behaves differently than the terms of the contract -- after the contract has been signed and agreed to -- it's considered fraud.

Still worse: People who get relief in the form of a revised mortgage contract weren't even hurt by the robo-signing scandal, the presumed basis of the settlement. (Note to self: Get Robin Hood caps for President Obama, Attorney General Eric Holder and HUD Secretary Shaun Donovan.)

For the capitalists in the audience, this may represent an opportunity a la the 1998 tobacco settlement, in which the attorneys general extracted $206 billion from private enterprises selling a legal product. When the settlement was announced in November of that year, the price of what is now Altria(MO) sunk to about $5 on a split adjusted basis. Today, it's about $29, representing a compound annual return of nearly 16%, before counting what is one of the best dividends on the Street.