Federal Regulators Sue Big Banks Over Mortgages

September 3, 2011

By  and KEVIN ROOSE, The New York Times

A bruising legal fight pitting the country’s most powerful banks against the full force of the United States government began Friday, as federal regulators filed suits against 17 financial institutions that sold the mortgage giants Fannie Mae and Freddie Mac nearly $200 billion in mortgage-backed securities that later soured.

The suits are the latest legal salvo fired at the banks accusing them of misdeeds during the housing boom. Investors fled financial shares Friday amid growing concern that the litigation could last for years and undermine earnings and balance sheets in the process.

The complaints were filed just as the stock market closed Friday afternoon, but with word leaking out of the impending legal action during the trading session, shares of Bank of America fell more than 8.3 percent, while JPMorgan Chase dropped 4.6 percent and Goldman fell 4.5 percent.

“The suits only add to the uncertainty that dogs the industry,” said Mike Mayo, an analyst with Crédit Agricole. “Banks should pay for what they did wrong, but at the same time they shouldn’t be treated as a big piñata that has the effect of delaying the housing recovery. If banks have to pay for loans they made five years ago, are they going to make new ones?”

After the savings and loan crisis in the late 1980s and early 1990s, years of litigation followed. The mortgage bust and the subsequent financial crisis have spawned a similar legal fight, said Jaret Seiberg, a financial policy analyst with MF Global in Washington. “It’s going to be exceedingly difficult and take years to play out,” he said. “There’s not much incentive for either side to settle.”

The litigation represents a more intense effort by the federal government to go after the financial services industry for its supposed mortgage failures.

Indeed, the cases were brought on the basis of 64 subpoenas issued a year ago, giving the government an edge in its investigation that private investors suing the banks lack.

To read more, visit: http://www.nytimes.com/2011/09/03/business/bank-suits-over-mortgages-are-filed.html


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