The Federal Housing Finance Agency (FHFA) has “taken the most sweeping action to date” by a US federal regulator in connection with the mortgage meltdown, says Nick Timiraos in The Wall Street Journal. It is suing 17 banks, including Goldman Sachs, Bank of America, RBS, HSBC and Barclays, for allegedly mis-selling $200bn of mortgage-backed securities. Dodgy securities were sold to government-backed mortgage giants Freddie Mac and Fannie Mae without adequate risk disclosure, according to the suit. Their value slumped during the credit crisis.
The FHFA hasn’t said how much it is seeking in damages, but the sum is expected to be around $40bn, which is about the amount Fannie and Freddie lost on the securities. Bank share prices slumped on the news, notably those of RBS, which is on the hook for $30bn of securities. Only Bank of America and JP Morgan sold more: $57bn and $33bn respectively. The banks are set to argue that Fannie and Freddie knew the loans were risky and were therefore not victims of misleading underwriting. But while Fannie and Freddie are far from blameless in the “transgressions that caused the crisis”, this “subtracts nothing from the need to achieve redress from the banks”, says the FT. They have “walked away from their pre-crisis incompetence…[and] must be held accountable for errors and malpractice”. Not going after the banks, agrees David Dayden on Firedoglake.com, would have amounted to yet another subsidy for an industry that’s already had too many.
Some analysts reckon that suing the banks could “blow away the banking system”, as Anthony Peters of SwissInvest puts it, undermining recovery by squeezing credit provision. But this risk is exaggerated, given that it’s lacklustre demand for credit, rather than its availability, that is the key obstacle to recovery, says the FT. If history is a guide, the likeliest outcome is “settlements without admitting guilt”, says Businessinsider.com. But this legal headache further clouds the outlook for banks. Investors are worrying about further damage to bank balance sheets as the economy turns down again or a European banking crisis goes global. “Prospects for the financial sector overall,” says Deutsche Bank boss Josef Ackermann, “are rather limited.”