Feds target large banks for mortgage damages

When large corporations have to make important announcements that may not cast them in the best of lights, they tend to issue a press release late on a Friday afternoon. That’s when companies announce mass layoffs, plant closings, lawsuits and the like.

The thinking behind the Friday afternoon shtick is that most people have checked out for the weekend and aren’t paying attention, thereby minimizing the public relations impact of the negative news.

The federal government also plays this game of PR timing. Since the Great Recession, the Federal Deposit Insurance Corp. (FDIC) issues its “Friday night massacre” announcements about troubled banks that will be closed on Friday evening after the stock market has closed.

The Federal Housing Finance Agency (FHFA) dropped the latest Friday bombshell on the afternoon of Friday, Sept. 2, when it announced it had filed federal lawsuits against 17 of the largest banks for their roles in the subprime mortgage crisis that led to the global economic collapse.

That’s quite an accusation to be made – on the Friday of the long Labor Day weekend, no less.
For the record, the 17 banks that are defendants in the suit are: Ally Financial Inc. f/k/a GMAC LLC; Bank of America Corp.; Barclays Bank PLC; Citigroup Inc.; Countrywide Financial Corp.; Credit Suisse Holdings (USA) Inc.; Deutsche Bank AG; First Horizon National Corp.; General Electric Company; Goldman Sachs & Co.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Merrill Lynch & Co./First Franklin Financial Corp.; Morgan Stanley; Nomura Holding America Inc.; The Royal Bank of Scotland Group PLC; and Société Générale.

The complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933.

In addition, each complaint seeks compensatory damages for negligent misrepresentation.

Some of the complaints also allege state securities law violations or common law fraud.

“As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and conserving these companies’ assets and does so on behalf of taxpayers. The complaints filed today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings,” the FHFA said in its Friday afternoon announcement. “Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.”

Some analysts have speculated that as much as $200 billion could be at stake in the lawsuits, though the agency says that figure is “excessive.”

The FHFA insists that the suits were not filed to merely make a vain political statement, but instead are intended to produce tangible financial recoveries for taxpayers.

“Some have claimed that these suits will disrupt economic recovery, or endanger the targeted banks, or increase their cost of capital. While everyone is concerned with these important issues, the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation’s financial system. Therefore, through these lawsuits, FHFA turns to the courts to adjudicate the violations that it has alleged in its complaints,” the agency stated.

Bank of America issued the following statement in response to the filing of the lawsuit: Bank of America released the following statement in response to the lawsuits: “The GSEs (government sponsored enterprises) have in their past public statements acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment. Also, they claimed to understand the risks inherent in investing in subprime securities and, in fact, continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so. Despite this, the GSEs are now seeking to hold other market participants responsible for their losses.”

Financial journalist Felix Salmon at Reuters said of the lawsuits, “They’re strong, and aggressive, and exactly what I’ve been looking for for a while. These banks lied to investors when they put together mortgage securitizations. And one way or another, they’re about to start paying for that. About time too.”

Steve Jagler is executive editor of BizTimes Milwaukee.

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