Government Sues Big Banks Over Risky Mortgage Securities

Originally published on September 3, 2011 9:28 am

The Federal Government filed suit against more than a dozen big banks over mortgage backed securities the banks sold during the housing boom. Essentially the government claims the banks were selling securities that were riskier than advertised.

As we reported earlier, The New York Times reported this news, last night. But, now, the Federal Housing Finance Agency, which was appointed to oversee mortgage buyers Fannie Mae and Freddie Mac, filed the lawsuits today.

As NPR's Jim Zarroli put it to All Things Considered's Melissa Block, this lawsuit hits 17 of "the biggest, most important financial institutions" in the world. Bank of America, JPMorgan Chase, Deutsche Bank, Goldman Sachs and Citigroup are all included in the lawsuit.

Jim said this is the government's attempt to collect billions in losses that Fannie and Freddie sustained buying bad mortgages. The government alleges that the banks sold them by providing "materially false or misleading statements and omissions."

This is a suit similar to one filed by the government against UBS last year, said Jim. Except that it broadens the scope to many more financial institutions. The reason the government is acting now, said Jim, is because the statute of limitations is about to expire.

The Times classifies the government's move as the most "intense effort by the federal government to go after the financial services industry for its alleged mortgage misdeeds." Remember that the financial collapse in 2008 was in large part driven by the subprime mortgage crisis.

Jim told Melissa that this new suit "greatly complicates" life for banks. "A lot of them are already in a morass of legal problems," said Jim. Private investors are filing suits and many state attorney generals are taking them to court because of what they say are illegal foreclosure practices.

All of that along with the economic downturn "has left them in a precarious situation," said Jim.

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MELISSA BLOCK, host: From NPR New, this is ALL THINGS CONSIDERED. I'm Melissa Block.

ROBERT SIEGEL, host: And I'm Robert Siegel. Federal housing regulators sued 17 big banks today over mortgage-backed securities they sold during the housing boom. The Federal Housing Finance Agency accused Bank of America, JPMorgan Chase, Citigroup and others of selling securities that were far riskier than advertised. NPR's Jim Zarroli joins us from New York. And, Jim, what can you tell us about what exactly the FHFA alleges these banks did?

JIM ZARROLI: Well, these were some of the biggest and most important financial institutions not just in the United States but really in the world - Bank of America, Citigroup, Deutsche Bank, JPMorgan Chase, Barclays - and they were all involved in, you know, to one level or another, in the mortgage securities business during the subprime boom. And the agency basically says that they sold just huge numbers of these without due diligence, without any real attempt to judge whether the mortgages underlying them were as sound as they were supposed to be. They made no effort, for instance, to check things like, you know, did the mortgage holders have the income that they claim to have?

Now, this is, you know, a charge that's been leveled many times against the big financial institutions over the past few years. Last year, the agency issued subpoenas against these banks. The reason they filed suit now is that the regulators concluded that the statute of limitations is about to run out on some of these abuses, and they thought they had to act now.

SIEGEL: Now, I want you to remind us about the FHFA, what it is and when it came about.

ZARROLI: Well, you will remember, no doubt, that Fannie Mae and Freddie Mac suffered huge losses after the subprime crises. They are big mortgage companies. They had to be rescued by the federal government. The FHFA is the agency that was formed to oversee them, really, on behalf of taxpayers. And what the agency said is that Fannie Mae and Freddie Mac bought billions of these securities: $24 billion worth from Citigroup, 6 billion from Bank of America. Many of them turned out to be bad investments, and the losses were borne by the government, by taxpayers. And now the agency says it wants to recoup some of these losses.

It filed a suit in July against the Swiss bank UBS, asking for $900 million in damages. And this just extends sort of the legal front to many more banks. It just really broadens the battle against them.

SIEGEL: Jim, we're talking about banks that were rescued themselves during the financial crisis. What does this mean for them?

ZARROLI: Well, that's going to complicate life for them. A lot of them already face lawsuits from private investors, just kind of a legal morass. A lot of them are right now negotiating with state officials over what's called robo-signing. In other words, they were accused of foreclosing on people's homes without filing proper documentation. So there has just been this legal overhang that they've had to contend with, and it's made life a lot less certain for them. Now they're facing this suit. And I think it just puts a lot more pressure on them to try to negotiate a settlement.

You know, the banks in general came through the financial crisis in good shape, and that was thanks in great part, some might say, to the federal bailout. But the downturn in the economy has left - and also, the European debt crisis has left them in a just a more precarious situation. So a lot of analysts are saying, you know, this is one more big problem for them to contend with, and it's just going to make the future a lot less certain for them.

Jim, the regulator isn't specifying how much money it's seeking here from the 17 banks, but it obviously would be many billions. We're talking about lots. Any word from the banks?

Well, not so far today. But in the past, they've argued that, you know, that these securities losses were caused by the downturn in the economy, not by the way these securities were put together. They've also said, you know, Fannie Mae and Freddie Mac were sophisticated investors who should have known what they were getting into.

SIEGEL: NPR's Jim Zarroli speaking to us from New York. Thanks, Jim.

ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.