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More bank stock declines and less lending could be in store as financial institutions face another massive round of lawsuits. The Federal Housing Finance Agency sued 17 banks on Sept. 2, alleging that the financial institutions committed securities violations in the lead-up to the recent financial crisis.
The lawsuit concerns sales by the institutions to Fannie Mae and Freddie Mac of almost $200 million in residential private-label mortgage-backed securities that later collapsed. The lawsuit also names some of the banks’ officers and unaffiliated lead underwriters.
In addition to the securities violations, the lawsuits allege that the banks made negligent misrepresentations and failed to do adequate due-diligence and follow standard underwriting procedures when offering the mortgage-backed securities.
The complaints were filed in both federal and state courts (New York and Connecticut) against 17 banks, including major financial institutions like Bank of America, Barclays, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley and others. The lawsuit is substantially similar to the suit filed against UBS Americas earlier this year.
Fannie Mae and Freddie Mac were placed into conservatorship in 2008, right after the subprime mortgage crisis made public waves. Under the conservatorship, the FHFA has control over the government-sponsored enterprises and has the power to bring lawsuits on their behalf, as it did in this case.
The feds waited to file the lawsuit until the stock market was closing for the Labor Day weekend Sept. 2. But the timing didn’t prevent a run on bank stocks as rumors about the suit led to significant declines in bank stock prior to the release. This latest litigation comes on the heels of the 50-state robosigner foreclosure investigation which by itself could cost banks almost $200 billion.
Some in Washington say not bringing the suit would have been akin to giving the banks another bailout. U.S. Rep. Brad Miller, D-NC, praised the FHFA for bringing the suit, saying that “[n]ot pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.”
But other commentators say the government’s timing of the lawsuit couldn’t be worse. It will hit the banks’ bottom lines when they can least afford it. And with interest rates likely to stay at record lows for the next two years and the Federal Reserve running out of options for stimulating bank lending, the cost may further stagnate the slow economic recovery. It’s hard to imagine how the lawsuit could be anything other than a weight on the already fragile economy.
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See also The Law Professor's blog at AdvisorFYI.