Some of the largest U.S. banks are facing a massive lawsuit over mortgage securities that is expected to be worth tens of billions of dollars as the problems of the credit crisis continue to plague the financial sector three years later.
In the biggest round of litigation stemming from the credit crisis so far, the U.S. Federal Housing Finance Agency (FHFA) launched a lawsuit Friday against 17 financial institutions, including Bank of America Corp. , Goldman Sachs Group Inc., Deutsche Bank AG, JPMorgan Chase & Co., HSBC Holdings PLC, Barclays Bank PLC, Nomura Securities Co. Ltd. and others.
The suit alleges that the banks sold mortgage-backed securities improperly by misrepresenting the quality and risks of the investments. It stems from a wave of subpoenas issued to the banks last year.
The FHFA, which oversees mortgage giants Fannie Mae and Freddie Mac, filed a similar suit against European bank UBS AG in July. That case is said to be the blueprint for this larger lawsuit.
The suit against UBS seeks unspecified damages for about $4.5-billion (U.S.) of residential mortgage-backed securities sold to Fannie and Freddie, alleging that the buyers weren't told of how risky some of the assets actually were. Fannie Mae and Freddie Mac lost more than $30-billion from mortgage-back securities and other assets that crumbled during the credit crisis.
The suit launched Friday alleges the banks pooled thousands of mortgages and sold them as securities without proper due diligence. In particular, U.S. media reports say the suit alleges the banks missed or ignored signs that incomes of many borrowers were being incorrectly reported to secure more loans, or larger amounts. None of the allegations have been proven in court.
Expecting the lawsuit to be launched on Friday, Bank of America chief financial officer Bruce Thomson sought to reassure staff on in an internal memo, saying the bank figured the suit was coming, given that the statute of limitations on legal action relating to the issue would soon expire.
"We've made tremendous progress in resolving mortgage-related legal claims," Mr. Thomson wrote. "Now we have to simply let the judicial process work."
For investors, there are concerns about the impact on bank stocks from this lawsuit and others of a similar nature that have already been launched.
In a separate suit launched Friday, German lender IKB Deutsche Industriebank AG sued JPMorgan Chase & Co. over mortgage-backed securities it purchased. The suit alleges "material misrepresentations and omissions" by JP Morgan, along with its Bear Stearns division, according to court documents filed in New York.
As officials seek to lay blame at the foot of lenders they believe acted improperly, some observers are concerned about the ability of some banks to withstand added problems. Bank of America has committed $30-billion to deal with legal claims over faulty mortgages, and the bank has reportedly been asked by the U.S. Federal Reserve how it plans to deal with more litigation should it arise.
The developments are bad news for already battered U.S. bank stocks, which have been under intense pressure over the past two months due to the U.S. debt downgrade and fears about a weakening economy.
Drawn-out litigation is seen by analysts as a drain on the banks, and there are concerns such lawsuits could drag on for years. The news pushed U.S. bank stocks down Friday, with the benchmark U.S. bank index falling 5 per cent.
Bank of America shares lost more than 8 per cent, while JPMorgan Chase shed 5 per cent from its stock. UBS fell more than 4 per cent.
The lawsuit is one of several probes into the lending sector that led to the housing market collapsing in the United States. Attorneys-general from all 50 states are seeking $20-billion in damages from the country's largest mortgage-service companies in a suit over improper lending and aggressive foreclosures that were done without proper oversight.
That suit looks at the use of so-called robo-signers in markets such as Arizona and Florida, where foreclosure documents were digitally approved or completed by unqualified staff without proper scrutiny. Such methods were used to keep up with heavy workloads, but lawyers allege that thousands of foreclosures happened improperly as a result.
With files from Bloomberg News