
U.S. Set to Sue a Dozen Big Banks Over Mortgages - ryanwhitney
http://www.nytimes.com/2011/09/02/business/us-is-set-to-sue-dozen-big-banks-over-mortgages.html?_r=1&hp
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crag
These lawsuits are to recoup some of the loses incurred by issuing FHA loans
(Frannie and Freddie). Both agencies were mislead by the various banks. Who
did everything they could to issue "FHA"loans. Both agencies relied (and they
still do) on the banks writing the loan to verify credit worthiness. Which of
course, the banks didn't. They were making too much money.

It was a win win for the bank. Cause when the bottom fell out of the housing
market Freddie and Frannie were left holding the bag - in other words, the
taxpayers. Add that on top of that, TARP, and the banks walked away making
trillions.

It was the biggest heist in history. And perfectly legal, in the US.

The case will probably be settled. Banks will pay like 20 billion (or so) and
we're all forget it in a week.

~~~
mdda
"Verify credit worthiness" : This is part of the problem. The documentation
likely only specifies that the banks had to obtain a recent FICO score. Not do
'real due diligence' on the actual credit worthiness of the borrowers.

And while FICO scores may have been relevant data for historical default
analyses, as soon as evening courses in 'Fix your credit score' appeared, the
historical data became a completely worthless foundation upon which to base
any analysis.

So from a legal standpoint, the banks probably have a decent case to claim
that they did what they were contractually obliged to do. From a realistic
standpoint, though, they see that it's in the hands of politicians now, and
they'll settle rather than become/remain a political football in 2012.

~~~
crag
I would agree with that. Expect the bank also lowered the required FICO score.

15 yeas ago you needed at least 610 score with a 15 to 25% deposit to buy a
house. In 2006 you need a FICO score of 520 ad no deposit. You didn't even
need job.

The banks didn't do their job. They were making fortunes on fees and reselling
the loans.

BUT the government didn't do it's job either. The banks didn't exactly hide
the fact they were doing this. I mean, every real estate agent knew it. I'm
sure the various government agencies did too. But no one cared cause everyone
was making money.

Until the house came down. :)

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giardini
This isn't enough.

Break the banks up so that the failure of one is insignificant. Put limits on
bank size so that they must split if they grow beyond a certain size. Accounts
at institutions that deal in derivatives should be denied federal insurance;
those that deal in loans should be federally insured.

Anyone who made more than $5M working for the banks or financial institutions
during the last 15 years should be denied employment at any financial
institution for the next 20 years and investigated for evidence of criminal
wrongdoing.

~~~
kanamekun
I couldn't agree more that banks should face severe penalties, both civil and
criminal, if they engaged in system fraud or deception.

But denying someone employment _and investigating them for criminal
wrongdoing_ because they made more than $5m working for financial
institutions?! You must not know any venture capitalists... and in any case,
whatever happened to innocent until proven guilty?

~~~
yuhong
Yea I'd at least investigate if they were any criminal wrongdoing FIRST, then
deny employment if it turned out they were.

~~~
kanamekun
I don't think we need any new laws for this:

* If someone committed a crime, then they will usually be in jail (a pretty effective way to be denied employment!) * If they've also violated an SEC statute (or settled with the SEC), they will often be barred from the securities industry for life by the SEC. Examples include Michael Milken and Henry Blodget. Or they can be barred for life from serving as an officer or director of any public company (examples include Angelo Mozilo of Countrywide Financial).

We don't need new ways to blackball people. We have a powerful system of civil
and criminal statutes that do a great job of doing that. The problem is that
nobody is being prosecuted for any crimes by state or federal prosecutors, or
by federal agencies like the SEC. That's the real problem to solve.

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sudonim
Why slap the banks on the wrist with punitive damages when you could cut them
off at the knees by actually making systemic changes to address some of the
root causes of these types of bubbles?

~~~
flourpower
Even after excluding a big mortgage related charge, Bank of America's net
income last year was only 756 million dollars. If you estimated that each of
the named banks would have to pay out an eighth of the 20 billion with the
other ten billion dollars spread out across unnamed banks, you'd still be
charging them 3 times what they make in a year. That's more than a slap on the
wrist.

~~~
joezydeco
Just wait. They'll all settle out of court for a tenth of the price and the
government will pat themselves on the back with a victory.

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victoro
This may be a gross oversimplification, but I don't get it: First the
government bails out the large banks to the tune of 600 billion (give or take
a few billion), 3 years ago. Now they realize that the banks were perpetrating
fraud in the first place and decide to spend potentially millions (or maybe
even hundreds of millions) along with the precious time of the already over-
booked and underfunded federal court system to sue them. All to get some small
fraction of the money that they gave to the banks back. And the banks will
probably be using money the government gave them (some of that 600 billion had
to last until now right?) to pay for their defense. Is this all basically an
elaborate money laundering scheme for government lawyers, or just an expensive
case of the US government being indian givers?

~~~
RuadhanMc
I think people tend to forget that the banks were bailed out because if they
weren't then the world's financial system would have shriveled up and died --
remember the credit markets had actually _ceased to function and as a result
no one could borrow money_.

Credit markets and the shadow banking system
[http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Cre...](http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Credit_markets_and_the_shadow_banking_system)

I haven't seen any credible arguments against bailing out the bank which would
have ensured that the financial system didn't completely collapse. Some argue
that we should have let the crisis take its own course, let the banks fail and
deal with the consequences. But this would have guaranteed a second great
depression and the vast majority of the world would have been negatively
affected in a very bad way.

Now without congress actually doing anything against the banks there aren't
too many options left, but hopefully the banks being sued can keep this issue
in the spotlight longer to encourage public rage, so that Congress is actually
forced to do something of significance.

~~~
giardini
>But this would have guaranteed a second great depression and the vast
majority of the world would have been negatively affected in a very bad way.

But we are in a recession as deep as the Great Depression! And there are
obvious undeserving winners (Wall Street) and losers (everyone who worked
hard, paid their bills on time, invested conservatively, and saved money).

------
ck2
But not one single executive who made the actual decisions will serve a single
day in prison.

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georgehaake
Put people in jail.

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yummyfajitas
I'm a little confused by this story. It appears that the banks were victims of
fraud by homeowners:

 _"...failed to perform the due diligence required under securities law and
missed evidence that borrowers’ incomes were inflated or falsified."_

The contention is that the banks did not due their due diligence in rooting
out this fraud. So why are the regulators "[p]ressing the banks to pay at
least $20 billion in that case, with much of the money earmarked to reduce
mortgages of homeowners facing foreclosure?"

Shouldn't the regulators be prosecuting the people who took out fraudulent
mortgages, rather than pressuring banks to reward them?

~~~
ahi
The banks weren't victims, but co-conspirators. The banks were looking the
other way on these "liar loans" because they weren't going to be keeping them
on their books anyways. The banks just packaged them up into neat bundles,
slipped the ratings agency a couple fivers, and resold them as AAA debt.

~~~
alexqgb
Liar's loans were closely related to NINJA loans - No Income, No Job, No
Assets.

These transactions made sense only in a world where the mortgage issuers knew
they could turn around and resell them before the ink was even dry. The buyers
of this paper, in turn, were only willing to pay when they knew they could
bundle the obviously-sketchy loans into securities that allowed them to safely
extract a 'clean' payment stream. And by 'safely' I mean they knew they could
dump the toxic byproducts on buyers who could insure against (very likely)
losses. This backstop position required the participation of an insurance firm
(AIG) that was free from any legal requirement to hold collateral commensurate
with their exposure to risk.

Everyone involved in this racket knew full well that the 'investment'
operations they were running were fully enmeshed with the boring but vital
infrastructure of everyday banking - paychecks, credit card processing,
savings accounts, etc. In other words, they knew they had the country by the
throat. So it's not that they were too big to fail - they were too important
to fail. When the music inevitably stopped, there was never any doubt that
taxpayers would get the shaft.

All this was possible because the firms involved have so much power in
Washington that their lobbyists literally wrote the law, handing drafts to
their former colleagues who working directly for the Senators and Congressmen
in change of rubber-stamping these 'rules'.

Nothing in this - and I mean nothing - is even remotely consistent with
victim-hood in any sense of the word. The fact that the banks are playing this
card - which entails admitting that their lender verification and risk-
management standards are utterly worthless - indicates that they feel
perfectly safe in making what should be deeply incriminating remarks with
absolutely no fear of sanction.

~~~
mdda
Sidestepping the editorial : The basic problem with NINJA loans was that the
historical payment/default characteristics were very encouraging.

When the rating agencies modeled up new asset classes, they naturally gathered
as much historical data as possible. For NINJA loans, the historical dataset
was pretty small, since banks don't normally lend to such hopeless cases.
However, when they _did_ lend, the facts of the particular loan normally went
something like : House buyer works for himself as a builder/developer, gets
paid in cash, plays golf with the bank manager - and everyone knows that he's
good for repayment (even if his tax returns don't show any income).

The major problem with this is that the statistical data did not contain these
qualitative factors, and showed only that people with No (declared) Income, No
(on-the-books) Job and No (visible) Assets paid back their loans consistently.
That became codified into a simple fill-in-the-form application which missed
the entire point... And loan brokers went to town, with the loans eventually
packaged up and dumped into a pool.

At it's heart, the root cause of the problem is that rating agencies did a
horrible job of understanding the risks that were embedded in the different
types of loans. And no-one had an incentive to let them in on the 'trick'
(and, perhaps, the rating agencies were willfully blind to what was going on).
Since the middle-men were only short-term holders of each mortgage, the risk
got transferred from modeling spreadsheet to investors in pools who trusted
the ratings agencies within months or weeks.

Frankly, the politicians were completely outside the loop, and the regulators
trusted that the Rating Agencies were doing a good job. Terrible assumptions.

