Today's Outrage: Contracts, Schmontracts

So, which is it FRBNY? Are we for contract law this week or against it?
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NEW YORK (

TheStreet

) -- The

Federal Reserve Bank of New York

is joining with

PIMCO

and

Blackrock

(BLK) - Get Report

to force

Bank of America

(BAC) - Get Report

to buy back bonds that could be tainted by the foreclosure document mess. The outrage! The shock! These poor investors were snookered by the heartless bank and investors everywhere should be outraged. Except....

...that would force us to divorce ourselves from reality, if we're to believe those bond daddies had no idea what they were buying.

First we're supposed to believe Bill Gross is a market guru, but now all of the sudden he's been "taken" by Bank of America? Blackrock somehow missed reading the

Wall Street Journal

to see what was happening in the bond market. Let's buy them a subscription. How do these esteemed giants of Wall Street suddenly claim they had no idea that waitresses making $20,000 a year were buying $500,000 homes that were then foreclosed upon because they couldn't make the payments? When did that happen?

The real trouble with this ménage a trois is our friends down the Street, the FRBNY -- the very same organization that was supposed to regulate the bank that it now wants to sue. The Federal Reserve was never intended to get into the mud with the pigs it was watching. It was created as an independent entity. Yet, wallow it has. The Federal Reserve took over Bear Stearns' toxic assets so that Jamie Dimon would buy Bear for $2 a pop .... make that $10. Called it Maiden Lane, the street in front of the Fed, and then told the public it was none of their business what was in the portfolio.

So, now I guess we know what's in the Maiden Lane portfolio. Bank of America mortgage-backed securities. Mystery solved. Scooby snacks for all. The Federal Reserve had no businesses owning this portfolio in the first place. Insisted it would make money on it when all was said and done. Told the public to trust its valuation numbers. Then out of the blue -- joins a very public lawsuit.

Remember, the Treasury has been insisting that banks modify loans and forgive principal -- essentially trashing what was considered the very basis of contract law. Oh, that pesky contract you signed, where you said you'd pay for this house, don't worry about that. Let's just tear that up. Then -- whoa, back up Nelly, how dare the Bank of America not respect homeowners' due process? How dare Bank of America not respect the very important paperwork processing? So, which is it FRBNY? Are we for contract law this week or against it?

Missing from this pig pen is

Fannie Mae

and

Freddie Mac

. The largest lenders out there also used the same document mills that

JP Morgan

(JPM) - Get Report

and Bank of America used. The big fab Florida five as they are known. Fannie has only discontinued using David J. Stern and continues to use the others. Fannie has signed Power of Attorneys with these document mills. For your reading pleasure, here's a link: http://pubrec3.hillsclerk.com/oncore/showdetails.aspx?id=13950858&rn=7&pi=0&ref=search. Maiden Lane is loaded with their paper, but we don't hear about the FRBNY suing them, do we?

So, why then does the FRBNY very publicly goes after one of its charges? Fines. It can't get any money from Fannie Mae. Fannie is on life support as it is. So, the FRBNY teams up with two other thugs and goes to shake down Bank of America.

Maybe the New York's Fed chief Bill Dudley still thinks he's at

Goldman Sachs

(GS) - Get Report

? Goldman isn't stupid. Goldman pawned off its

AIG

(AIG) - Get Report

toxic assets, which then got dumped onto the Fed, which became Maiden Lane 2 & 3. He's just following a page from the Goldman Sachs play book. Make yourself whole at all costs.

Brian Moynihan, CEO of Bank of America, put it very well when he said about the bond buyers, "I bought a Chevy ... but want it to be a Mercedes." The FRBNY wants desperately to not have to admit to the public it's got a vault full of toxic assets. It wants the Vega to be a Lexus.

-- Written by Debra Borchardt from New York

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.