Federal Reserve Targets Big Banks

Bringing to a close a three year investigation, Federal regulators are nearing a settlement with Fannie Mae and Freddie Mac.  In a proposed agreement with the Securities and Exchange Commission, no monetary penalty or admission of fraud will be required of the loan giants.  Regardless of any admission of guilt, the settlement would represent an acknowledgment by the mortgage companies of their role in the housing boom and bust.

With the close of this case, Federal Regulators are setting their sights on a much larger target.  On September 2, 2011, Federal Regulators filed suits against 17 financial institutions that sold nearly $200 billion in mortgage backed securities to Fannie Mae and Freddie Mac, which later soured forcing those loan giants into near collapse requiring tax payers to bail them out.  The rescue of the mortgage giants has cost taxpayers $153 billion, and the Federal Government estimates the effort could cost $363 billion through 2013.

The suits go a little further in their efforts to hold those responsible for the questionable subprime loans and subsequent packaging of those loans by naming individuals at many of the institutions who were leaders in turning subprime mortgages into securities that somehow earned a AAA grade from the rating agencies.

After the suits were filed many of the institutions released statements foreshadowing what their defense strategies may be, specifically that Fannie Mae and Freddie Mac were sophisticated investors who should have known that the securities were not with out risk, and that the losses were not caused by fraud but instead were caused by underlying difficulties in the housing market.

This would seem to be a weak argument when we consider what then Federal Reserve Chairman Alan Greenspan said about the subprime mortgage market, stating that the repackaging of and sale to investors of risky home loans, not the loans themselves, was to blame for the current global credit crisis.

Greenspan also implicitly criticized the role of ratings agencies in the crisis, saying, “The problem was that people took that as a triple-A because ratings agencies said so”.

Many of the institutions named in the suit will not be able to use the implied ignorance of Fannie Mae and Freddie Mac in defense for their arguments. For example, in the complaint against Goldman Sachs, the suit says that, “Goldman was not content to simply let poor loans pass into its securitizations.” An outside analytics firm, Clayton, identified potential problems in the underlying mortgages Goldman was turning into securities. The suit claims, “Goldman simply ignored and did not disclose the red flags revealed by Clayton’s review.”

Related posts:

1. Freddie Mac Needs Another Bailout
2. Federal Reserve Move Lowers Mortgage Rates Below 5%
3. More Changes Ahead for Freddie Mac and Fannie Mae
4. Fannie and Freddie Planning to Aide Lenders
5. The Impending Reform of Fannie Mae and Freddie Mac

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