8 Things You Should Know About the New Lawsuit Against the Banks That Torpedoed the Economy
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It was Friday afternoon, near market closing time, when the Federal Housing Finance Agency filed lawsuits against 17 big banks for their role in the subprime mortgage crisis that created, in turn, the financial crisis we're still struggling with today.
The suits accuse the banks of fraud, of lying to the federal government and to investors about the quality of the securities they were making by cranking out more and more subprime loans. The charge allows the FHFA to ask for punitive damages as well as actual damages. The amount of the suits is not yet known, but they allege nearly $200 billion in fraudulent securities were sold just to Fannie Mae and Freddie Mac, the government-backed (and now, post-bailout, basically government-owned) mortgage lenders.
The news was big, yet it was dropped in the Friday news-dump hole before a holiday weekend, probably to try to mitigate its impact on stock prices. (Markets also take a day off for Labor Day, though one has to doubt they thank workers for the rest.) Otherwise, you'd think they would have broken the news in a big way on a day when people might actually be paying attention.
The suits were filed in advance of a September 8 deadline—the statute of limitations on claims over subprime mortgage-backed securities sold to Fannie and Freddie. The FHFA was created in 2008 as conservator for the two lenders, which have been given $170 billion in government cash in order to keep them afloat.
So the government, representing the taxpayers (you and me) who own Fannie and Freddie, is filing suit against 17 of the world's biggest banks, including our old friends Bank of America (and its subsidiaries Merrill Lynch and Countrywide, named separately), Goldman Sachs, and JP Morgan Chase as well as Deutsche Bank, the Royal Bank of Scotland (RBS), and, surprisingly, General Electric.
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.”
Representative Brad Miller, Democrat of North Carolina, said in a conference call, “I want our money back. If FHFA has legitimate claims...I want them to pursue legitimate claims to minimize taxpayer losses. I don't want them to look the other way and to provide a subsidy for that industry.”
While this story will keep developing, we break down eight things you should know about the suits, the banks involved, and the potential political and economic consequences.
1. Accelerating the Bank of America death spiral
Felix Salmon broke down the lawsuits into a table and pointed out that since Bank of America's two subsidiaries, Countrywide and Merrill Lynch, are named separately from B of A itself, the wobbly bank is by far the biggest loser in the lawsuit. Rep. Miller noted that nearly one quarter of the mortgage-backed securities in these lawsuits come from Bank of America.
B of A stocks are down almost to where they were before Warren Buffett put $5 billion into the bank, and it's got more layoffs coming—up to 30,000 jobs might be shed, which would be about 10 percent of the company's total employees.
The New York Times pointed out that while the total damages in the suit have yet to be determined, a similar lawsuit brought in July by the FHFA against UBS seeks to recover $900 million in losses on $4.5 billion in securities—or 20 percent. “A similar 20 percent claim against Bank of America could equal a $10 billion hit.”