Suing the Banks

The US government filed suit for fraud against 17 big banks yesterday, alleging that they misrepresented the riskiness of $200 billion worth of securities bought by Fannie Mae and Freddie Mac.

According to the court filings, those firms and others “falsely represented” the quality of the loans that were bundled into securities and sold to investors and “significantly overstated the ability of the borrower to repay their mortgage loans.” The result, the suits claim, were investments that were far riskier than the banks led taxpayer-backed Fannie and Freddie to believe, and the securities ultimately were worth a fraction of their original value.

Of course the irony of this is that Fannie Mae and Freddie Mac are involved in more than half the mortgages sold in the US, so if anybody ought to have understood the risks involved in sub-prime mortgages, it should have been them. So I think the claim made in the paragraph above is false. The fraudulent element was the overselling of the financial wizardry behind the bundling. The banks told their customers that even if the bundles included some dubious loans, the risk was magicked away by bundling them with enough good loans, thereby allowing investors to get the returns of the sub-prime market without the risks. Big financial players ought not to have been fooled by that, either, but many were.

I support these suits anyway because I think there has to be a statement made about crazy bank practices. Republicans are determined to gut any new regulations, so I think the best way to control the big banks in the future may be the fear of lawsuits.