Is it Acceptable to Present a $196 Billion Sac-O'-Sheet to Sophisticated Investors as Diamonds-in-the-Rough?

The FHFA has filed a $196 Billion lawsuit against 17 banks accusing said banks of "misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities".

Inquiring minds note BofA, JPMorgan Among 17 Banks Sued by U.S. for $196 Billion.

Bank of America Corp. and JPMorgan Chase & Co. (JPM) were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.

“The loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities,” the FHFA said in a statement.

“The claims brought by the FHFA are unfounded,” said Frank Kelly, a spokesman for Frankfurt-based Deutsche Bank. “Fannie Mae and Freddie Mac are the epitome of a sophisticated investor.”

Lawsuit Claims

Please consider FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac

The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the Enterprises), today filed lawsuits against 17 financial institutions, certain of their officers and various unaffiliated lead underwriters. The suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the Enterprises.

Complaints have been filed against the following lead defendants, in alphabetical order:

1. Ally Financial Inc. f/k/a GMAC, LLC - $6 billion
2. Bank of America Corporation - $6 billion
3. Barclays Bank PLC - $4.9 billion
4. Citigroup, Inc. - $3.5 billion
5. Countrywide Financial Corporation -$26.6 billion
6. Credit Suisse Holdings (USA), Inc. - $14.1 billion
7. Deutsche Bank AG - $14.2 billion
8. First Horizon National Corporation - $883 million
9. General Electric Company - $549 million
10. Goldman Sachs & Co. - $11.1 billion
11. HSBC North America Holdings, Inc. - $6.2 billion
12. JPMorgan Chase & Co. - $33 billion
13. Merrill Lynch & Co. / First Franklin Financial Corp. - $24.8 billion
14. Morgan Stanley - $10.6 billion
15. Nomura Holding America Inc. - $2 billion
16. The Royal Bank of Scotland Group PLC - $30.4 billion
17. Société Générale - $1.3 billion

These complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933, similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011. In addition, each complaint seeks compensatory damages for negligent misrepresentation. Certain complaints also allege state securities law violations or common law fraud.

$196 Billion Sac-O'-Sheet

The 17 banks are from the FHA filing, the amounts above are from the Bloomberg article.

Please note the Deutsche Bank defense: "Fannie Mae and Freddie Mac are the epitome of a sophisticated investor."

The DB defense has me asking a pair of questions

1. "Should Gannie and Freddie have known better?"


2. "Is it Acceptable to Present a $196 Billion Sac-O'-Sheet to Sophisticated Investors as Diamonds-in-the-Rough?"

The answer to question number 1 is "of course".

I am not a lawyer, but I believe the heart of the matter is question number 2. More explicitly, did the banks violate disclosure laws in submitting loans to Fannie and Freddie.

I believe the banks not only did so, but purposely and blatantly did so.

Bank of America Extremely Exposed

Note the Bank of America exposures, and the accompanying Bank of America stock weakness.

2. Bank of America Corporation - $6 billion
5. Countrywide Financial Corporation -$26.6 billion
13. Merrill Lynch & Co. / First Franklin Financial Corp. - $24.8 billion

Where is Wells Fargo?

By the way, where is Wells Fargo?

Is Wells Fargo lily white and if so was is it because they were stupid enough to hold all the mortgage paper themselves?

Final Thoughts

The FHA took its sweet time filing this lawsuit. I believe purposely so. They have had all the time in the world to gather evidence and make a case. This is a serious case, and Fannie and Freddie have subpoena power. That subpoena power gives the FHFA a big advantage over private investors notes the Wall Street Journal in Big Banks Face Suits on Mortgage Bond Losses

Bank of America is scared to death and rightfully so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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