Still 'too big to fail'?

A federal lawsuit filed Friday could kill chances of a comprehensive foreclosure fraud settlement.

By Jim J. Jubak Sep 2, 2011 5:55PM
Jim JubakBig U.S. banks led the U.S. stock market down Friday.

The driver here isn’t simply the prospect of slower economic growth represented by the lack of any job growth in August data released today -- although that certainly doesn’t help.

Bank stocks are reeling because the big U.S. mortgage lenders and mortgage packagers were anticipating a suit be filed by the Federal Housing Finance Agency, which represents Fannie Mae and Freddie Mac, seeking to force these financial companies to repurchase bad mortgages.

The agency did file a lawsuit late Friday, saying the banks sold bonds backed by mortgages that should not have been packaged into securities.

The amounts at stake -- and it’s extremely hard to put a dollar figure on this suit -- could dwarf the $20 billion sought in a suit brought by the states' attorneys general.

Fannie Mae and Freddie Mac own about $227 billion of the so-called "private label" mortgages that are the subject of this suit. Bank of America (BAC) probably faces the biggest exposure, since it sold the most of these private label mortgages to Fannie Mae and Freddie Mac.

No surprise then that Bank of America closed the day down 8.3%, JPMorgan Chase (JPM) 4.6%, Goldman Sachs (GS) 4.6%, Citigroup (C) 5.3%, and Wells Fargo (WFC) 4.5%.

The suit would be the result of 64 subpoenas issued last year to originators and servicers of mortgage-backed securities. The statute of limitations is due to expire next week, so the Federal Home Finance Administration has to file or forever hold its peace.

The subpoenas and the likely suit focus on private label mortgage-backed securities originated by mortgage lenders, packaged by Wall Street investment companies, and then sold to investors. Fannie Mae and Freddie Mac were permitted to buy slices of these securities, which carried AAA ratings.

As of the end of July, the two companies -- now owned by taxpayers -- held $78 billion and $149 billion in such securities, respectively.

Private label mortgage-backed securities have been among the worst performing mortgage-backed assets, showing the kind of losses nobody expects from AAA-rated securities. The likely suit would allege that the banks in question misrepresented the content of the mortgage pools when they packaged them and sold them to Fannie Mae and Freddie Mac.

Testimony in front of the Financial Crisis Inquiry Commission showed that a large percentages of mortgages included in mortgage-backed securities deals had received inadequate due diligence, and that the big Wall Street investment companies ignored those problems and packaged them in the mortgage pools anyway.

The suit from the Federal Housing Finance Agency could be a nightmare for the big mortgage banks, not just because of the sums involved, but because it would also pretty much blow up all other efforts to put together settlements that would cap bank liabilities.

Forget about the proposed settlement with state attorneys -- a settlement already in danger. And it would almost certainly bring other investors into court demanding that banks buy back their mortgage paper too.

But the effects don’t stop there.

First, the suit from the Federal Housing Finance Administration -- headed by Ed DeMarco, a Bush administration holdover -- could kill the already slim chances of any comprehensive foreclosure fraud settlement. Part of that settlement would have granted banks immunity against mortgage-foreclosure lawsuits in exchanges for a program of mortgage relief to stressed mortgage holders. Forget immunity now.

And without immunity, banks aren’t going to do more to prevent mortgages on the verge of default from going into foreclosure.

Second, the potential hits to the big banks are large enough to raise fears about the need for these banks to raise new equity capital. With financial markets in their current state, raising new capital wouldn’t be easy for these banks.

And that, of course, raises worries that the Federal Reserve would have to lead another rescue effort for some of the too-big-to-fail banks.

The Wall Street Journal has reported, for example, that the Federal Reserve has asked Bank of America to explain its contingency plans if its financial condition deteriorates. One option the bank listed would involve floating a class of shares backed by its Merrill Lynch unit.

The mortgage crisis just keeps on giving.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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Sep 2, 2011 7:09PM
It will be interesting to see how this plays out. The first time around this stuff was all papered over and the banks got 100 cents on the dollar (paid by taxpayers) for the junk. That stuff has to stop. One thing for sure, the big salary and compensation packages for bank execs have got to go and stockholders should take the haircut. More than a few of those guys should be in jail.
Sep 2, 2011 10:57PM
Still 'too big to fail'?

Not his time around.  Banks that violated the laws have to be held accountable .. and that doesn't mean giving outrageous bonuses to corporate executives with golden parachutes attached.  This legal action gives a new meaning to "stress test".

Sep 2, 2011 8:34PM
If you did it wrong you failed,   you lose. If you did with full knowledge  you broken the law and should go to jail.  Either way  you should be out and allow someone who can succeed.
Sep 3, 2011 1:18AM

Some heads need to roll.  And for the guy who made the comment that Realtors should also be held accountable, Realtors did not approve the loans... the lenders did!!  I'm not saying that some Realtors did not know their clients were not credit worthy and probably took them to lenders who would approve them when others would not.  But what I am saying is that the lenders themselves were responsible for getting proof of loan qualification and they made the decisions to write the loan or not to write the loan.  It was a joke back then... if you could breathe, you could get a home mortgage.  Realtors who couldn't sell a fish were selling lots of homes.  I scratched my head during those times wondering how in the world all these people were qualifying for these loans.  Now I know. 


I am sick and tired of hearing "too big to fail."  If they don't know how to run a profitable business without resorting to fraud and greed, then they shouldn't be in business at all!!  They need to also go after the millions of dollars these bankers put away during these times.  But I'm not so sure about bailing out everybody who got one of those loans and cannot pay for it now... they knew they couldn't afford it when they got the loan!  I'm for letting those homes go into foreclosure but possibly reimbursing those buyers what they PUT INTO the home and having it not count against them on their credit reports.  I am not for reducing everyone's balance to what they can afford... that is not fair to those of us who have worked to pay our mortgages and live within our means.  Most of these people bought with nothing or next to nothing as a down payment.  If they have nothing in the home, why should I pay for them to keep the home by lowering the balance to what they can afford???!!  That sounds like another welfare program. 


My husband lost his job too and we are eeking by with me working to keep our home but it was a home we could afford to begin with.  I'm sick of everybody looking to the government for a damned bailout because when they look to the government, they are looking to me and you to bail them out with taxpayer dollars.  If we get to the point we cannot afford to make our payment, we will try to sell and if we cannot within a certain period of time, then it will be a foreclosure but I'm not asking you to bail me out!  That's the problem with our country... everybody thinks the governmetn can fix everything and somebody owes them something!

Sep 3, 2011 2:35PM

Anything to big to fail holds us, the American people, hostage. Let the banks stand on their own two feet like every other American has to except the super rich and those who know how to use, abuse, and exploit. Most of us want only a level playing field. Unfortunately, those who we put in power, don't care about anything other their lobbyists and big business and stockholders. America has gone from a land of opportunity to a country of disproportional wealth and poverty.

Sep 3, 2011 9:46AM
Too big to fail?  How about too sick to keep alive!!!  Their greed not only sickened the country but ironically has placed a death sentence on themselves.  By all means let them die and the $ that would have been used can be put into place to help the economy.  Sorry Mr. Buffet, but you just lost 5 Billion.  Next time you want to put your money to good use, try giving to reputable businesses.  They are all ticks that have fed off americans long enough, and it's time to remove these bloated, parasitic, disease ridden entities once and for all.   
Sep 2, 2011 7:55PM
This is not going to be good.  But . . . . . . here we go anyway.
Sep 3, 2011 9:55AM
They already failed.

 We just wouldn't allow them to take the pain or responsibility for that failure.

Either we let them crumble and we all take the initial painful hit, and then watch as they are bought out by other healthy banks ripe for growth and happy and eager to lend and watch our economy soar and recover better and stronger than ever  OR we bail them out again and keep twisting the knife until our economy suffers a long, slow, painful demise with no recovery ever. If we were a true capitalist society this problem would have been over and done and our economy would already be growing again instead of us still three years later "trying to get it growing again".

We need to stop making decisions based on the  fear of what would happen if these banks finally go under like they should. They screwed up and they should pay the price and face the consequences of their actions instead of having record profits and paying big bonuses. It is the injustice of the whole corrupt bailout that has cast a pall over our economy and our psyche. Bury these useless, greedy, crooked, indifferent, treasury draining zombie banks once and for all. Save the tears of pity for the average American who has been allowed to fail through no fault of their own. The banks don't deserve any immunity from law suits because they haven't done anything to really help homeowners or modify any mortgages. The whole thing has been a joke and based on their performance on that front alone they should be buried 12 feet under.  

Sep 3, 2011 4:36PM
Why aren't the rating agencies who  blessed these securities with a Triple A rating also held accountable?
Sep 2, 2011 10:27PM
Sep 3, 2011 3:19AM



Btw, BoA was on the literal cusp of the legal % limit before the catastrophe.

Sep 3, 2011 2:30PM

Maybe this lawsuit is a setup so the the FED can have an excuse later for throwing more money at these criminal enterprises (ie. banks).


In other words, when this lawsuit puts the banks in danger of failure again, the FED will have their excuse for more theft from OUR pockets.

Sep 3, 2011 4:33PM
i love how the banks are to big to fail but social security isnt,billions for banks none for ssi,which had money taken from it at times,shure the damn ssi up,at least when people spend their ssi they keep other people working,oh no that would be to easy,idiots!!!!!
Sep 3, 2011 9:49AM
These banks have NEVER put a good foot forward to help the struggling unemployed homeowner. Subprime loans leveled at 11% or higher. All the banks in a lot of cases had to do was lower the interest rate from 11% to 6% and a lot of these houses would never have gone into foreclosure. But these big banks would rather foreclose on a home than lower the rate.  How much money do they have to make?  Well, now the greedy s.o.b.s' may have to pay a REAL price for their greed.  BofA is laying of 3,500 workers with the possibility of laying of 10,000 more.  The old boy network is trying to bail each other out now.  Some lying billionaire is investing 5 billion dollars in BofA.  I hope that BofA goes down like it should.  America is going to have to start over or we are all going to be taking mexican't and chinese language classes.  It's all a new meaning for the phrase "huddled masses".  That's us boys and girls.
Sep 3, 2011 1:28PM

The anger and resentment in this country towards the "professional" money managers and politicians is astounding. The despair and confusion in the face of what is to be done about it all, no matter what your political stripe, is equally distressing. The start will come from electing people (and hopefully not "professional" politicians) to Congress who will enact the will of the people and and have the personal integrity not to succumb to the bribery of the rich and powerful corporations and the wealthy individuals who use their lobbyists as their effectual bagmen. The time is now for America to rethink its purpose and shift away from defining itself entirely in terms of the Almighty Dollar and integrate a more spiritually enlightened approach to life. As a people, with its vast wealth of virtues, ideas and experience, it can be done. As President Kennedy stated:" Ask not what your country can do for you - ask what you can do for your country". Those words are without political implication, left or right, they are simple words spoken in truth by a leader of what was then the most powerful country in the world. If those words are taken to heart by all Americans, then you will be able to right the ship of state and fulfill the promise as a nation your forefathers envisioned.  Good Luck, America.

Sep 3, 2011 4:37PM
how about some jobs also,is that to much to ask?people bitch about this and that,call your congressman and bitch,let these bastards know whats gonna happen at election time.
Sep 3, 2011 9:32AM
Money is not real, it is paper used to represent time, time is an illusion of the mind. A trick of perception. Wealth is another, the illusion that you are above another based on all the time vouchers you have accumulated, as if they can be spent to lengthen your life in a meaningful or fulfilling way. When will the people of this world unite and tell the governments NO! ALL financial institutions CAN FAIL! They're not physically REAL. They are one representation of reality built on another. When the truth gets out that the houses will still stand,people can still participate in their jobs and life can still go on. People can still be happy. What power will the stock market hold over us. We may as well be looking at a colorful terror alert chart to let us know how scared we need to be today. Better yet a video of Goldstein and all of his thought-crime guilty supporters.
Sep 3, 2011 7:42AM
Taxpayers are left holding the bag, look at the wider picture.  In my 40 years of working and learning of financial responsibility I have never seen such panic and posturing to stay ahead of the train wreck.  What we are truely witnessing is the unraveling and slow collapse of our way of life.  Regardless of political party outcomes the financial picture will worsen from the crushing debt and its ensueing interest burden.  Banks to big to fail...!....eventually overleverage requires payments and the money needs to come from somewhere.  Triple A or B credit ratings make no difference, the investments were phony, money flowed like water from the tap....the music stopped and now we need to pay the piper.  Liberal do gooders pandering voters with endless welfare have destroyed our country. 
Sep 3, 2011 1:02PM
the greenspan trap is too large to reverse in the short run. it will take three to five years to implement a workable solution. you should note that the increase in the fdic guarantee from 10,000 to 100,000 preceded the first large wave of failures. the more recent increase to 250,000 will only exacerbate the problem, but it was essentially after the fact. the ceiling should be reduced back to 100,000 at some date certain in the future ( say 6 to 12 months). this will force the depositor to understand the depository bank. the fed must  be forced to raise the discount rate directly or indirectly. the fed must force banks to give depositors credit for deposits in four days or less. individuals must return to being responsible for their actions. it would be preferable to reintroduce glass steagall (sp). it will not be easy, but if steps are not taken the u s middle class will continue to deteriorate.
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