Saturday, September 3, 2011

Government Sues 17 Banks Over Faulty Mortgage Backed Securities

This news broke early on Friday, but details were just coming in as the markets were closing.

The Federal Housing Finance Agency is the conservator for failed federal GSEs, Fannie Mae and Freddie Mack. The agency seeks a total of $196 billion in damages in state and federal courts from the named defendants, including some $24.853 billion from Merrill Lynch and First Franklin Financial (owned by Bank of America). All of the charges are made in connection with false or misleading representations and warranties made to Fannie and Freddie by the banks.

The list is pretty much a who's who of the sub-prime and general mortgage crisis which pushed the global economy to the brink of disaster back in 2008, including such notables as Goldman Sachs, Bank of America, JP Morgan Chase, Citigroup, Countrywide Financial (now part of Bank of America), Deutsche Bank and others.

American Banker points out that the largest exposure - $57 billion - belongs to Bank of America (BAC) because the bank not only sold $6 billion of MBS to Fannie and Freddie, but the figure grows larger when factoring in the damages charged against Merrill Lynch and Countrywide, both acquired by BofA during the financial crisis. JP Morgan Chase has to deal with $33 billion in claims, including those of Bear Stearns and Washington Mutual, both of which were taken over by JP Morgan Chase.

Below is the press release in which the agency lays out the charges. Here is a link to the individual cases.


While most of the American public must be cheering this news, it's about the worst that could happen to the TBTF banks, being that their reputations and balance sheets are both on shaky footing. The hardest hit will surely be Bank of America, which is being sued by virtually the whole planet, including AIG and USBancorp.

The litigation involved in these cases will likely take many months, if not years, to settle and will cost the banks dearly in legal costs, which are already taking their tolls on profits.

In addition to the banks, a multitude of individuals are charged with various violations of securities laws, though none of the CEOs - such as Jaime Dimon, Dick Fuld or Lloyd Blankfein - are among the defendants. Obviously, the government is going after the lowest-hanging fruit in an attempt to garner public support by going after "bad guys."

This is a developing story with far-reaching implications for the global economy. MoneyDaily will stay abreast of events as they develop.

With any luck, we may witness actual "perp walks" as the lower-level employees implicate the top rung of the banking elite. The thought of seeing Jaime Dimon or Lloyd Blankfein in leg irons and handcuffs is almost too delicious to consider.

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