On Sept. 2, federal regulators launched a battle royal against some of the world”™s biggest financial institutions, filing lawsuits against 17 major lenders that sold mortgage giants Fannie Mae and Freddie Mac nearly $200 billion in mortgage-backed securities that went awry.
Among the companies being sued by the Federal Housing Finance Agency, which now oversees Fannie and Freddie, is General Electric Co. in Fairfield, Conn. In addition, UBS was sued by the FHFA in July over a similar claim, bringing to 18 the total pool of lawsuits.
While the government is seeking to recover billions of dollars in damages stemming from the failed mortgages, financial experts are questioning the merit of the lawsuits, saying the FHFA will be hard-pressed to back up any of the allegations in court.
“This is just the next chapter in the blame game of trying to move around the costs of the financial crisis. Maybe some of these lawsuits will settle ”¦ but I do not see them in any way materially impacting any of the organizations being sued,” said Andrew L. Sandler, chairman and executive partner of BuckleySandler L.L.P., a law firm specializing in the financial services sector that has offices in Washington, D.C. and New York City.
Sandler said the premise of the lawsuit ”“ that Fannie and Freddie were misled by the lenders being sued ”“ is a reach at best, particularly because the two government-owned mortgage giants agreed to take on the securities with the knowledge that they were composed of low-quality loans.
“Of the existing and potential lawsuits out there, this one is not one of the more threatening ones to these organizations,” he said.
General Electric, for its part, said it would “vigorously contest these claims” in a statement from company spokesman Russell Wilkerson. He said the company was given no advanced notice and had no discussions with federal regulators prior to the lawsuit being filed earlier this month.
Ronald Filante, professor of finance at Pace University”™s Lubin School of Business in White Plains, said these lawsuits will likely shed light on the securities underwriting process in addition to putting the rating agencies under the spotlight for never raising any red flags over mortgage-backed securities in the run-up to the subprime mortgage crisis.
“There was a complete miss, a complete misjudgment about these securities and how volatile they were,” Filante said. “It just brings up a ton of different issues, some of which relate to the market itself (and) if the market is fairly valuing these securities.”
In addition to General Electric, the other 16 companies that are being sued by the FHFA are Ally Financial Inc., Bank of America Corp., Barclays Bank P.L.C., Citigroup Inc., Countrywide Financial Corp., Credit Suisse Holdings Inc., Deutsche Bank A.G., First Horizon National Corp., Goldman Sachs and Co., HSBC North America Holdings Inc., JPMorgan Chase and Co., Merrill Lynch and Co., Morgan Stanley, Nomura Holding America Inc., The Royal Bank of Scotland Group P.L.C. and Societe Generale.
