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17 Banks, 17 Suits

You probably didn’t hear about this at any Labor Day barbecues last weekend.  If you did, you need to go to better parties. The Federal Housing Finance Agency, which oversees Freddie Mac and Fannie Mae, filed suits late Friday afternoon against 17 of the biggest financial institutions.  The agency claims that the institutions—a who’s who of heavy-hitters, from Citigroup to Royal Bank of Scotland—misrepresented material information for almost $200 billion in mortgage backed securities.  If you would prefer a more precise number, it’s $196,165,000,000 and change.

According to the New York Times, FHFA may seek a 20% claim for each of the seventeen suits.  (They base this number on a July filing against UBS—which, by the way, is not even in Friday’s list of 17 complaints.)  Bank of America faces three suits, one for its own mortgage backed securities ($6 billion) and one for each of it subsidiaries, Merrill Lynch and Countrywide ($24.853 billion and $26.6 billion, respectively).  I ran the math:  20% of $57 billion is “Ouch!”

The defense attorneys in these cases will offer a simple question:  “Are you telling me that Fannie Mae and Freddie Mac, the world’s biggest mortgage companies, are unsophisticated investors?”  It’s a strong argument.

The plaintiff’s will offer a strong counterargument:  “Well, it does not matter how sophisticated the investor is.  If the fraud is well constructed, anyone can get fooled.”

And then, the judge will totally be like, “_________________!!!” 

That is, who knows where this will end?

The government seeks recovery for its own coffers here, but of particular interest to securities investors is the new information that this case has made, and will make, public.  The Times article states that “the cases were brought on the basis of 64 subpoenas issued a year ago, giving the government an edge in its investigation that private investors suing the banks lack.”

Lacked, that is, until now.  Plaintiff’s attorneys, as we have pointed out before, will certainly be following these cases— nay, they’ll be scouring every single document produced in each of the 17 cases.  Without a doubt, the cases brought by FHFA will beget many more private litigations in the coming months.