The Obama Administration, as part of a regulatory investigation that included a coalition of 49 state attorneys general, imposed a multi-billion dollar fraud settlement ($16.6 billion) on the Bank of America for alleged misconduct in its mortgage practices – and is now allowing the bank to reduce its liability by nearly $200 million, as long as it gives millions of dollars to liberal groups approved by the Obama Justice Department.

Yes, that’s right. A little-noticed provision of the “historic” settlement reached with the Bank of America allows the bank to wipe $2 off its settlement obligations for every $1 it pays to organizations such as the Hispanic civil rights group, the National Council of La Raza ($1.5 million), the National Urban League ($1.1 million) and the Neighborhood Assistance Corporation of America ($750,000). Overall, Bank of America is obligated to donate $100 million to approved non-profits, $20 million to housing groups, $30 million to legal aid groups, and $50 million to public or private community development funds, but the doubled credit mechanism allows the Bank to increase these amounts and make unlimited contributions to reduce its liability – with money that would otherwise go to the government.

Bank of America is not alone. Similar provisions in the multibillion dollar settlements with Citigroup, Morgan Stanley and Goldman Sachs create slush funds for liberal groups fueled by the doubled credit mechanism incentivizing the diversion of funds to these favored groups. The banks only get a dollar for dollar credit for direct consumer relief, such as forgiving delinquent loans, thus exposing not only the flawed theory of the mortgage settlement but the brazenly political abuse of government power to enrich the Administration’s supporters and buy votes.

Federal law requires that all funds or revenue obtained by the government from any source whatever must go into the Federal treasury, and may only be spent by Congress, but that principle of the public fisc has been laid waste by these outrageous deals by characterizing these payment obligations as “voluntary donations” agreed to before settling. Further, these state AGs and the Obama Justice Department have no lawful business either raising government revenue or controlling its spending by redirecting such revenue to third parties.

None of these favored groups were victims of the alleged mortgage fraud, and further, these banks’ sloppy paperwork was not the cause of the historic wave of foreclosures created in large part by government-backed Fannie Mae and Freddie Mac and government insistence that banks make questionable loans to avoid charges of credit discrimination. Only a miniscule portion of these mega-settlements has been used to compensate alleged victims of wrongful foreclosures. The rest of the money provided for direct cash payments to state and federal governments – think of it as ad hoc government revenue raising without having to pass a pesky or unpopular tax increase. And now the government is giving away that largesse – to politically favored groups.

What does a government coalition of state and federal attorneys general do when it shakes down an industry for more money than can possibly be directed to the alleged problem the government suit sought to address? Well, first and foremost, it pays millions to the contingency fee lawyers at firms such as Cohen & Milstein who assisted them in this abuse of government power, and second, the governments, state and federal, pay themselves a big old off-budget revenue increase for their efforts in bringing about the settlement. Borrowing a page from the classless class action bar’s lawless misapplication of cy pres doctrine, if there is still money left over, incentivize the industry to steer contributions to the political supporters of the Administration, a list of liberal groups approved by the Obama administration overseeing the settlement by giving the industry double-money-back credits for such blatantly political funding, at the same time outrageously disincentivizing compensation for the harm that supposedly gave rise to the deal in the first place.

The biggest loser in all this is the rule of law and the separation of powers under our state and federal constitutions.