There’s another large bank being sued by the U.S. government this week – Bank of America. What’s new, you may ask, which is reasonable since it seems there’s another large bank suit every day.
From the Wall Street Journal:
The federal government filed a civil lawsuit against Bank of America Corp., alleging the second-biggest U.S. bank by assets and its Countrywide Financial Corp. unit saddled taxpayers with losses by misrepresenting the quality of home loans they sold to mortgage-finance firms Fannie Mae and Freddie Mac.
The action, filed Wednesday in federal court in Manhattan, seeks at least $1 billion in damages. The filing represents an effort to defray costs tied to the 2008 bailout of Fannie and Freddie and potentially opens a new front against a banking industry already dealing with hefty legal costs.
The complaint alleges that in 2007 Countrywide, suffering from revenue shortfalls as the subprime-mortgage market collapsed, eliminated checks on loan quality in a process-streamlining effort called “the Hustle” while assuring Fannie and Freddie that it was toughening underwriting guidelines.
Bank of America said it “has stepped up and acted responsibly to resolve legacy mortgage matters. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”
At least the names of these scandals are getting better even if the basic premise of making loans to under qualified borrows is the same. Here’s an excellent point from the Businessweek story:
News of shoddy underwriting and misaligned incentives during the bubble is hardly shocking anymore. But two things are striking about this case. First, the Hustle wasn’t for subprime loans—it was for prime loans. Perhaps even more surprising is that Countrywide got the Hustle going in August 2007, when the party was already over. Subprime lenders started going belly up in mid-2006, and by mid-2007, investors had lost their appetite for mortgage-related securities.
While the subprime bubble was still growing, Countrywide could easily sell low-quality loans into the voracious private market for bonds backed by mortgages. Once that market went away, Countrywide created the Hustle to ramp up its origination of prime loans that could be sold to Fannie Mae and Freddie Mac. The suit charges that Bank of America kept the Hustle going through 2009.
But does it really matter if these banks are sued? There are dozens of lawsuits from the crisis, most settled “without admitting or denying wrong-doing.” Most recently, a federal mortgage task force filed a suit against JPMorgan Chase for alleged wrongdoing by Bear Stearns Cos. before JPMorgan bought the bank.
Even Rep. Barney Frank thinks that’s a bit of a stretch, to sue a firm for actions taken before it owned the offending company. He told CNBC that the suit set a dangerous precedent.
“I don’t want to set the precedent that when we go to someone in the future and say would you help us out, they say ‘no,’” said Frank, the ranking member on the House Financial Services Committee. “It is fair to say that when you did this in response to pressure from the federal government, you’re not liable for the mistakes of the people that were there before.”
The media agreed that this doesn’t apply to the Bank of America suit since the decision to buy Countrywide was their own and not done at the behest of the government. As the New York Times said:
Financial firms have been battling chaotic — and at times redundant — litigation related to the mortgage mess. The cases have come from a patchwork of federal agencies, state officials and shareholder suits, some of which have been resolved in multibillion-dollar settlements.
“They never know who’s going to be coming after them next,” said Dan Hurson, a former federal prosecutor who now defends securities cases. “There’s no central traffic cop.”
Still, the public has been frustrated with the limited number of criminal actions that have been filed since the financial crisis. Few cases have taken aim at top executives. Even in the latest case against Bank of America, no company officials were sued as part of the complaint. Angelo R. Mozilo, the former chief executive of Countrywide Financial, never faced criminal charges but did agree in 2010 to pay $67.5 million to settle a civil fraud case brought by the Securities and Exchange Commission.
Mr. Hurson said that the government had yet to overcome the notion that federal authorities were reluctant to pursue the top rungs of Wall Street. The criminal actions to come from the crisis, he noted, have focused on “small-time operators.”
I’m not sure what good the suit will do, but I guess it’s important to keep digging to get to the bottom of practices that need to stop. One thing’s for sure: it’s not the last of the mortgage lawsuits.
