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U.S. Set to Sue a Dozen Big Banks Over Mortgages

78 points by ryanwhitney 15y ago

yummyfajitas 15y ago
I'm a little confused by this story. It appears that the banks were victims of fraud by homeowners: "...failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified." The contention is that the banks did not due their due diligence in rooting out this fraud. So why are the regulators "[p]ressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure?" Shouldn't the regulators be prosecuting the people who took out fraudulent mortgages, rather than pressuring banks to reward them?
- ahi 15y ago
  The banks weren't victims, but co-conspirators. The banks were looking the other way on these "liar loans" because they weren't going to be keeping them on their books anyways. The banks just packaged them up into neat bundles, slipped the ratings agency a couple fivers, and resold them as AAA debt.
  - alexqgb 15y ago
    Liar's loans were closely related to NINJA loans - No Income, No Job, No Assets. These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk. Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft. All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'. Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.
    - mdda 15y ago
      Sidestepping the editorial : The basic problem with NINJA loans was that the historical payment/default characteristics were very encouraging. When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income). The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool. At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks. Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.
  - yummyfajitas 15y ago
    If that were the case, then the collapse of the bubble should not have harmed the banks. In fact, banks typically sold off the AAA tranches and kept the toxic waste for themselves. If housing continued to go up this would not have caused any problems. Regardless, even if banks and homeowners were conspirators, why should regulators punish one while rewarding the other? Shouldn't both parties be punished?
    - Klinky 15y ago
      Both the retail & investment side of banks held garbage which is why it harmed them. There was no "AAA" tranche, all the tranches were garbage. Magnetar Capital used the fallacy of the "A Tranche" to their advantage by selling off most of the CDO to suckers, then buying insurance against the whole thing. Housing would have only continued to go up so long as people bought houses & people could only buy houses because they were being given loans they could not repay. This is the first time I've heard that "foreclosure" is rewarding someone. I would agree that if the borrower knowingly falsified their income without influence or misguidance by the bank then they should be held responsible, but often that was not the case. The banks created a culture that lowered it's standards to the lowest levels, then either helped guide people into lying about their financial information, didn't ask about it or never verified it. They also helped promote things like ARMs which were big at the time because the low initial rate made it much easier to fit people into these loans. The banks didn't really check how feasible it would be for the person to pay back the loan once their rate adjusted though.
      - yummyfajitas 15y ago
        There was no "AAA" tranche, all the tranches were garbage. I suggest you go educate yourself. The banks constructed securities which were rated by various agencies as AAA. Regardless of whether the AAA rating was deserved, the which the banks sold had a lower risk than the non-AAA rated tranches which the banks kept on their books. Why would they do this if they knew the securities were unlikely to pay off? This is the first time I've heard that "foreclosure" is rewarding someone. According to the article, regulators are pressing banks to pay $20B, "with much of the money earmarked to reduce mortgages of homeowners facing foreclosure." That's a reward for people unable to meet their obligations, many of whom are likely to have lied on their application. ...the bank falsified the application themselves. [citation needed]
- kanamekun 15y ago
  The government did indeed sentence one person to mortgage fraud for inflating his income (a so-called, "liar loan"). This person is now serving a 21 month sentence: http://www.nytimes.com/2011/03/26/business/26nocera.html?pagewanted=all http://www.nytimes.com/2011/03/26/business/26nocera.html?pag... What about the bank that encouraged the home buyer to inflate or falsify their incomes? So far at least, they've largely escaped consequences for their pattern of encouraging fraud and shirking on their due diligence.
  - yummyfajitas 15y ago
    Most of the banks which encouraged/looked the other way on liars loans (e.g., Wachovia) no longer exist. How is that "escaping consequences"?
    - crag 15y ago
      Because those "filed" banks didn't die, They merged. JP Morgan picked up Bear in a fire sale, for a billion. Bear's Office building in NYC was worth more. Lehman went bankrupt.. but our government (us taxpayers) had to eat the mortgages in order for other banks to buy Lehman's assets. The banks just moved the money from A to B. BofA picked up Merrill for peanuts. Wachovia was picked up by Well Fargo. Another fire sale. And who lost out? Us taxpayers, and the employees. Mostly the back office staff. Most of the traders kept their jobs (and bonuses). And the executies made billions in buyouts, parachutes and stock transactions.
      - true_religion 15y ago
        I'd say the stock holders lost, and that's supposedly who owns and runs the company so they're the ones who should lose.
    - MaysonL 15y ago
      What is Angelo Mozilo's net worth? Have any of the bankers involved in any of the frauds gone to jail?
- sophacles 15y ago
  When I got my mortgage, I had non-traditional credit history stuff to deal with -- I had never really had serious credit prior to buying my house. While it turns out I am a good mortgage holder, paying on time every time, at the time the bank didn't know that. But when it came time to prove my worthiness, it seemed that the banker was willing to do an aweful lot of fudging if necessary to make the loan happen. It wasn't a statement of willingness to lie, just a lot of talk about "spinning it like $this or $that" and "we can make it look good". Not anything outright fraudulent, but I suspect there was a lot of intentional looking the other way and "spinning" going on by the banks, while at the same time telling the loan-seekers that it was "just how it works".
  - kanamekun 15y ago
    This is one of the many consequences of the securitization of mortgages. Back in the "good old days", a banker wouldn't want to inflate your credit-worthiness on a mortgage loan application because his or her bank would be relying on you to repay the loan. But once a bank could securitize your loan and there were limited to no consequences to their funding liar loans, you started to see more and more of them flooding the market.
    - caf 15y ago
      Misaligned incentives strike again!
- tzs 15y ago
  In many cases, falsified or inflated income on applications was done by the bank, not the applicant. The applicant provided the correct data, and the bank adjusted it to make sure a big mortgage would get approved. The banks were very eager to push mortgages. The story of my mortgage is a good illustration of how ridiculous the banks were in approving mortgages: I bought my first house in 2007, after almost 30 years of apartment living. I analyzed the crap out of my budget, and concluded that I could take up to a $300k loan tops. Any more would put in territory where my mortgage payments would be at a very risky level, and I'd have to be careful on spending to keep from falling behind. I went to Countrywide to get pre-approved so I could go house hunting. My credit rating had normally hovered around 790 at the big three, but when they pulled my credit report it happened to have zoomed up to around 830 (I do not know why). They asked for two months worth of bank statements covering my regular bank account and my investments, and pay stubs for the last month. Result? They would pre-approve up to $750k, and instead of an appraisal on any house I decided to buy they would just do some kind of online check of tax or insurance records. WTF? They are supposed to be professionals in this area. Yet they were willing to let me have a loan WAY beyond my means, and to trust my judgement as to the value of a house--based on the fact I've got a job, have managed to save a decent down payment, and my credit score is high (which doesn't show any financial sophistication--it just shows I have been able to pay my bill on time). I laughed at the ridiculous amount they were willing to pre-approve, and told them $300k was a big enough pre-approval for me, and continued looking for houses in the range I determined I could afford. (I ended up borrowing $224k).
  - omouse 15y ago
    That's the point. If you fall behind on your payments, they own your house. How much real estate do you think the banks own now because of these crap loans? They can sell that for whatever they want and on top of that, they got paid for it with the bailout. They are professionals; they know how to shape the system to work in their favour, not in your favour.
- guelo 15y ago
  Are you suggesting that thousands of average home buyers were able to defraud the army of professional bankers, brokers and lawyers? Somehow, just in the last decade, home buyers became so wily and conniving that they were able to trick all the professionals who's full time job it is to think about these things and have all the inside knowledge, resources, connections, etc? Oh the poor banks! Well if that's the case then those people all the way up to the CEOs should be fired anyway. I never understand this reflexive need of some people like yourself to defend the big powerful institutions in this type of discussion.
  - yummyfajitas 15y ago
    Are you suggesting that thousands of average home buyers were able to defraud the army of professional bankers, brokers and lawyers? Did you read the article? The article claims this is exactly what happened.
- danssig 15y ago
  wtf? Most likely the biggest heist in history and you want to go after the people who couldn't even afford to pay their mortgages? What do you expect to get from them? They obviously don't have any money.
sudonim 15y ago
Why slap the banks on the wrist with punitive damages when you could cut them off at the knees by actually making systemic changes to address some of the root causes of these types of bubbles?
- joezydeco 15y ago
  You're asking that facetiously, right? The answer to your question is simple: Wall Street runs this country. The people in charge of making US bank policy have all come from the banks themselves. http://themoderatevoice.com/93909/wall-streets-control-of-economic-policy-making/ http://themoderatevoice.com/93909/wall-streets-control-of-ec...
- flourpower 15y ago
  Even after excluding a big mortgage related charge, Bank of America's net income last year was only 756 million dollars. If you estimated that each of the named banks would have to pay out an eighth of the 20 billion with the other ten billion dollars spread out across unnamed banks, you'd still be charging them 3 times what they make in a year. That's more than a slap on the wrist.
  - joezydeco 15y ago
    Just wait. They'll all settle out of court for a tenth of the price and the government will pat themselves on the back with a victory.
- chaostheory 15y ago
  So the government can give the impression of fighting corruption.
- omouse 15y ago
  Because the system itself includes the government and why the hell would they do that to themselves??
giardini 15y ago
This isn't enough. Break the banks up so that the failure of one is insignificant. Put limits on bank size so that they must split if they grow beyond a certain size. Accounts at institutions that deal in derivatives should be denied federal insurance; those that deal in loans should be federally insured. Anyone who made more than $5M working for the banks or financial institutions during the last 15 years should be denied employment at any financial institution for the next 20 years and investigated for evidence of criminal wrongdoing.
- outside1234 15y ago
  I like the first part (break 'em up so any one can fail). The second part is partly our fault because we were dumb enough to let them too big to fail in the first place.
- CoffeeDregs 15y ago
  Ballsy. I sorta agree with #1. "Too big to fail" is too big. Doubly awesome, "too big to fail" is also counter to standard issue investing advice: diversify your portfolio. "Too big to fail" really means "poorly diversified portfolio". But #2 risks throwing out the baby with the bath water. No doubt that some people prospered solely at the expense of the taxpayer, but it's also likely that some of the people who prospered were competent folks who were just at the right place at the right time. Removing them, even if they did prosper,might remove the best folks to right the banks.
  - giardini 15y ago
    Well, honestly, I've toned my feelings down a bit in my post. My first thoughts were of mass Wall Street hangings, burnings at the stake and branding surviving executives/technocrats/economists on their foreheads with the letter "E" ("Its the Economy, Stupid!"). There are potentially at least 3 problems with employees involved: negligence, crookedness, and competence. I want to expand on the last of these, "competence", since, unlike the other 2 problems, I do not believe that it can be corrected. The financial industry has failed to absorb the lessons of the last 100 years concerning financial instruments. Taleb's "Black Swan" addresses this failure as does Fox's "The Myth of the Rational Market". Those executives/economists/technocrats unfamiliar with the ideas in those works should be removed forever from the industry. That means most of them. Why? Because they are ineducable - their entire training is based on defunct financial models. The finance industry must be rebuilt from the bottom up with more robust models. But I don't expect such real reform (of either sort: the burnings or the education). Instead I expect the same damn thing, another financial meltdown, to happen yet again within the next decade. Perhaps then some crazed financial Savanarola will be able to arouse the crowds to a passionate frenzy over the trillions lost. Maybe then heads will fall and true change will take place.
crag 15y ago
These lawsuits are to recoup some of the loses incurred by issuing FHA loans (Frannie and Freddie). Both agencies were mislead by the various banks. Who did everything they could to issue "FHA"loans. Both agencies relied (and they still do) on the banks writing the loan to verify credit worthiness. Which of course, the banks didn't. They were making too much money. It was a win win for the bank. Cause when the bottom fell out of the housing market Freddie and Frannie were left holding the bag - in other words, the taxpayers. Add that on top of that, TARP, and the banks walked away making trillions. It was the biggest heist in history. And perfectly legal, in the US. The case will probably be settled. Banks will pay like 20 billion (or so) and we're all forget it in a week.
- crag 15y ago
  I wanna add something.. there is one saving grace in all this mess; investors, AIG, countries, other banks; are all suing each other. BofA is facing 4 major lawsuits which could cost it billons (total I think is 80 billion). That alone might bring down the bank. But the more likely senario is that our government will once again step in to bail BofA out. Now that would cause a HUGE fight in Washington. But you know, the biggest statement you can make is to pull your money out of bofA (and the others). Find a credit union or a local bank. You are insured up to $250,000 per account in any US bank. So you don't have to do business with the big players. They don't care about you anyway. They just want your deposits.
  - mdda 15y ago
    But everyone suing everyone else doesn't help anyone apart from the lawyers. And the fights in Washington are utterly unproductive. In order for job creation to take place, the USA needs less volatility rather than more : If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...
    - crag 15y ago
      Completely agree. But tell that to your elected officials.
victoro 15y ago
This may be a gross oversimplification, but I don't get it: First the government bails out the large banks to the tune of 600 billion (give or take a few billion), 3 years ago. Now they realize that the banks were perpetrating fraud in the first place and decide to spend potentially millions (or maybe even hundreds of millions) along with the precious time of the already over-booked and underfunded federal court system to sue them. All to get some small fraction of the money that they gave to the banks back. And the banks will probably be using money the government gave them (some of that 600 billion had to last until now right?) to pay for their defense. Is this all basically an elaborate money laundering scheme for government lawyers, or just an expensive case of the US government being indian givers?
- RuadhanMc 15y ago
  I think people tend to forget that the banks were bailed out because if they weren't then the world's financial system would have shriveled up and died -- remember the credit markets had actually ceased to function and as a result no one could borrow money. Credit markets and the shadow banking system http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Credit_markets_and_the_shadow_banking_system http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Cre... I haven't seen any credible arguments against bailing out the bank which would have ensured that the financial system didn't completely collapse. Some argue that we should have let the crisis take its own course, let the banks fail and deal with the consequences. But this would have guaranteed a second great depression and the vast majority of the world would have been negatively affected in a very bad way. Now without congress actually doing anything against the banks there aren't too many options left, but hopefully the banks being sued can keep this issue in the spotlight longer to encourage public rage, so that Congress is actually forced to do something of significance.
  - giardini 15y ago
    >But this would have guaranteed a second great depression and the vast majority of the world would have been negatively affected in a very bad way. But we are in a recession as deep as the Great Depression! And there are obvious undeserving winners (Wall Street) and losers (everyone who worked hard, paid their bills on time, invested conservatively, and saved money).
ck2 15y ago
But not one single executive who made the actual decisions will serve a single day in prison.
georgehaake 15y ago
Put people in jail.

78 points by ryanwhitney 15y ago

I'm a little confused by this story. It appears that the banks were victims of fraud by homeowners: "...failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified." The contention is that the banks did not due their due diligence in rooting out this fraud. So why are the regulators "[p]ressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure?" Shouldn't the regulators be prosecuting the people who took out fraudulent mortgages, rather than pressuring banks to reward them?

ahi 15y ago
The banks weren't victims, but co-conspirators. The banks were looking the other way on these "liar loans" because they weren't going to be keeping them on their books anyways. The banks just packaged them up into neat bundles, slipped the ratings agency a couple fivers, and resold them as AAA debt.
- alexqgb 15y ago
  Liar's loans were closely related to NINJA loans - No Income, No Job, No Assets. These transactions made sense only in a world where the mortgage issuers knew they could turn around and resell them before the ink was even dry. The buyers of this paper, in turn, were only willing to pay when they knew they could bundle the obviously-sketchy loans into securities that allowed them to safely extract a 'clean' payment stream. And by 'safely' I mean they knew they could dump the toxic byproducts on buyers who could insure against (very likely) losses. This backstop position required the participation of an insurance firm (AIG) that was free from any legal requirement to hold collateral commensurate with their exposure to risk. Everyone involved in this racket knew full well that the 'investment' operations they were running were fully enmeshed with the boring but vital infrastructure of everyday banking - paychecks, credit card processing, savings accounts, etc. In other words, they knew they had the country by the throat. So it's not that they were too big to fail - they were too important to fail. When the music inevitably stopped, there was never any doubt that taxpayers would get the shaft. All this was possible because the firms involved have so much power in Washington that their lobbyists literally wrote the law, handing drafts to their former colleagues who working directly for the Senators and Congressmen in change of rubber-stamping these 'rules'. Nothing in this - and I mean nothing - is even remotely consistent with victim-hood in any sense of the word. The fact that the banks are playing this card - which entails admitting that their lender verification and risk-management standards are utterly worthless - indicates that they feel perfectly safe in making what should be deeply incriminating remarks with absolutely no fear of sanction.
  - mdda 15y ago
    Sidestepping the editorial : The basic problem with NINJA loans was that the historical payment/default characteristics were very encouraging. When the rating agencies modeled up new asset classes, they naturally gathered as much historical data as possible. For NINJA loans, the historical dataset was pretty small, since banks don't normally lend to such hopeless cases. However, when they did lend, the facts of the particular loan normally went something like : House buyer works for himself as a builder/developer, gets paid in cash, plays golf with the bank manager - and everyone knows that he's good for repayment (even if his tax returns don't show any income). The major problem with this is that the statistical data did not contain these qualitative factors, and showed only that people with No (declared) Income, No (on-the-books) Job and No (visible) Assets paid back their loans consistently. That became codified into a simple fill-in-the-form application which missed the entire point... And loan brokers went to town, with the loans eventually packaged up and dumped into a pool. At it's heart, the root cause of the problem is that rating agencies did a horrible job of understanding the risks that were embedded in the different types of loans. And no-one had an incentive to let them in on the 'trick' (and, perhaps, the rating agencies were willfully blind to what was going on). Since the middle-men were only short-term holders of each mortgage, the risk got transferred from modeling spreadsheet to investors in pools who trusted the ratings agencies within months or weeks. Frankly, the politicians were completely outside the loop, and the regulators trusted that the Rating Agencies were doing a good job. Terrible assumptions.
- yummyfajitas 15y ago
  If that were the case, then the collapse of the bubble should not have harmed the banks. In fact, banks typically sold off the AAA tranches and kept the toxic waste for themselves. If housing continued to go up this would not have caused any problems. Regardless, even if banks and homeowners were conspirators, why should regulators punish one while rewarding the other? Shouldn't both parties be punished?
  - Klinky 15y ago
    Both the retail & investment side of banks held garbage which is why it harmed them. There was no "AAA" tranche, all the tranches were garbage. Magnetar Capital used the fallacy of the "A Tranche" to their advantage by selling off most of the CDO to suckers, then buying insurance against the whole thing. Housing would have only continued to go up so long as people bought houses & people could only buy houses because they were being given loans they could not repay. This is the first time I've heard that "foreclosure" is rewarding someone. I would agree that if the borrower knowingly falsified their income without influence or misguidance by the bank then they should be held responsible, but often that was not the case. The banks created a culture that lowered it's standards to the lowest levels, then either helped guide people into lying about their financial information, didn't ask about it or never verified it. They also helped promote things like ARMs which were big at the time because the low initial rate made it much easier to fit people into these loans. The banks didn't really check how feasible it would be for the person to pay back the loan once their rate adjusted though.
    - yummyfajitas 15y ago
      There was no "AAA" tranche, all the tranches were garbage. I suggest you go educate yourself. The banks constructed securities which were rated by various agencies as AAA. Regardless of whether the AAA rating was deserved, the which the banks sold had a lower risk than the non-AAA rated tranches which the banks kept on their books. Why would they do this if they knew the securities were unlikely to pay off? This is the first time I've heard that "foreclosure" is rewarding someone. According to the article, regulators are pressing banks to pay $20B, "with much of the money earmarked to reduce mortgages of homeowners facing foreclosure." That's a reward for people unable to meet their obligations, many of whom are likely to have lied on their application. ...the bank falsified the application themselves. [citation needed]
kanamekun 15y ago
The government did indeed sentence one person to mortgage fraud for inflating his income (a so-called, "liar loan"). This person is now serving a 21 month sentence: http://www.nytimes.com/2011/03/26/business/26nocera.html?pagewanted=all http://www.nytimes.com/2011/03/26/business/26nocera.html?pag... What about the bank that encouraged the home buyer to inflate or falsify their incomes? So far at least, they've largely escaped consequences for their pattern of encouraging fraud and shirking on their due diligence.
- yummyfajitas 15y ago
  Most of the banks which encouraged/looked the other way on liars loans (e.g., Wachovia) no longer exist. How is that "escaping consequences"?
  - crag 15y ago
    Because those "filed" banks didn't die, They merged. JP Morgan picked up Bear in a fire sale, for a billion. Bear's Office building in NYC was worth more. Lehman went bankrupt.. but our government (us taxpayers) had to eat the mortgages in order for other banks to buy Lehman's assets. The banks just moved the money from A to B. BofA picked up Merrill for peanuts. Wachovia was picked up by Well Fargo. Another fire sale. And who lost out? Us taxpayers, and the employees. Mostly the back office staff. Most of the traders kept their jobs (and bonuses). And the executies made billions in buyouts, parachutes and stock transactions.
    - true_religion 15y ago
      I'd say the stock holders lost, and that's supposedly who owns and runs the company so they're the ones who should lose.
  - MaysonL 15y ago
    What is Angelo Mozilo's net worth? Have any of the bankers involved in any of the frauds gone to jail?
sophacles 15y ago
When I got my mortgage, I had non-traditional credit history stuff to deal with -- I had never really had serious credit prior to buying my house. While it turns out I am a good mortgage holder, paying on time every time, at the time the bank didn't know that. But when it came time to prove my worthiness, it seemed that the banker was willing to do an aweful lot of fudging if necessary to make the loan happen. It wasn't a statement of willingness to lie, just a lot of talk about "spinning it like $this or $that" and "we can make it look good". Not anything outright fraudulent, but I suspect there was a lot of intentional looking the other way and "spinning" going on by the banks, while at the same time telling the loan-seekers that it was "just how it works".
- kanamekun 15y ago
  This is one of the many consequences of the securitization of mortgages. Back in the "good old days", a banker wouldn't want to inflate your credit-worthiness on a mortgage loan application because his or her bank would be relying on you to repay the loan. But once a bank could securitize your loan and there were limited to no consequences to their funding liar loans, you started to see more and more of them flooding the market.
  - caf 15y ago
    Misaligned incentives strike again!
tzs 15y ago
In many cases, falsified or inflated income on applications was done by the bank, not the applicant. The applicant provided the correct data, and the bank adjusted it to make sure a big mortgage would get approved. The banks were very eager to push mortgages. The story of my mortgage is a good illustration of how ridiculous the banks were in approving mortgages: I bought my first house in 2007, after almost 30 years of apartment living. I analyzed the crap out of my budget, and concluded that I could take up to a $300k loan tops. Any more would put in territory where my mortgage payments would be at a very risky level, and I'd have to be careful on spending to keep from falling behind. I went to Countrywide to get pre-approved so I could go house hunting. My credit rating had normally hovered around 790 at the big three, but when they pulled my credit report it happened to have zoomed up to around 830 (I do not know why). They asked for two months worth of bank statements covering my regular bank account and my investments, and pay stubs for the last month. Result? They would pre-approve up to $750k, and instead of an appraisal on any house I decided to buy they would just do some kind of online check of tax or insurance records. WTF? They are supposed to be professionals in this area. Yet they were willing to let me have a loan WAY beyond my means, and to trust my judgement as to the value of a house--based on the fact I've got a job, have managed to save a decent down payment, and my credit score is high (which doesn't show any financial sophistication--it just shows I have been able to pay my bill on time). I laughed at the ridiculous amount they were willing to pre-approve, and told them $300k was a big enough pre-approval for me, and continued looking for houses in the range I determined I could afford. (I ended up borrowing $224k).
- omouse 15y ago
  That's the point. If you fall behind on your payments, they own your house. How much real estate do you think the banks own now because of these crap loans? They can sell that for whatever they want and on top of that, they got paid for it with the bailout. They are professionals; they know how to shape the system to work in their favour, not in your favour.
guelo 15y ago
Are you suggesting that thousands of average home buyers were able to defraud the army of professional bankers, brokers and lawyers? Somehow, just in the last decade, home buyers became so wily and conniving that they were able to trick all the professionals who's full time job it is to think about these things and have all the inside knowledge, resources, connections, etc? Oh the poor banks! Well if that's the case then those people all the way up to the CEOs should be fired anyway. I never understand this reflexive need of some people like yourself to defend the big powerful institutions in this type of discussion.
- yummyfajitas 15y ago
  Are you suggesting that thousands of average home buyers were able to defraud the army of professional bankers, brokers and lawyers? Did you read the article? The article claims this is exactly what happened.
danssig 15y ago
wtf? Most likely the biggest heist in history and you want to go after the people who couldn't even afford to pay their mortgages? What do you expect to get from them? They obviously don't have any money.

sudonim 15y ago

Why slap the banks on the wrist with punitive damages when you could cut them off at the knees by actually making systemic changes to address some of the root causes of these types of bubbles?

joezydeco 15y ago
You're asking that facetiously, right? The answer to your question is simple: Wall Street runs this country. The people in charge of making US bank policy have all come from the banks themselves. http://themoderatevoice.com/93909/wall-streets-control-of-economic-policy-making/ http://themoderatevoice.com/93909/wall-streets-control-of-ec...
flourpower 15y ago
Even after excluding a big mortgage related charge, Bank of America's net income last year was only 756 million dollars. If you estimated that each of the named banks would have to pay out an eighth of the 20 billion with the other ten billion dollars spread out across unnamed banks, you'd still be charging them 3 times what they make in a year. That's more than a slap on the wrist.
- joezydeco 15y ago
  Just wait. They'll all settle out of court for a tenth of the price and the government will pat themselves on the back with a victory.
chaostheory 15y ago
So the government can give the impression of fighting corruption.
omouse 15y ago
Because the system itself includes the government and why the hell would they do that to themselves??

giardini 15y ago

This isn't enough. Break the banks up so that the failure of one is insignificant. Put limits on bank size so that they must split if they grow beyond a certain size. Accounts at institutions that deal in derivatives should be denied federal insurance; those that deal in loans should be federally insured. Anyone who made more than $5M working for the banks or financial institutions during the last 15 years should be denied employment at any financial institution for the next 20 years and investigated for evidence of criminal wrongdoing.

outside1234 15y ago
I like the first part (break 'em up so any one can fail). The second part is partly our fault because we were dumb enough to let them too big to fail in the first place.
CoffeeDregs 15y ago
Ballsy. I sorta agree with #1. "Too big to fail" is too big. Doubly awesome, "too big to fail" is also counter to standard issue investing advice: diversify your portfolio. "Too big to fail" really means "poorly diversified portfolio". But #2 risks throwing out the baby with the bath water. No doubt that some people prospered solely at the expense of the taxpayer, but it's also likely that some of the people who prospered were competent folks who were just at the right place at the right time. Removing them, even if they did prosper,might remove the best folks to right the banks.
- giardini 15y ago
  Well, honestly, I've toned my feelings down a bit in my post. My first thoughts were of mass Wall Street hangings, burnings at the stake and branding surviving executives/technocrats/economists on their foreheads with the letter "E" ("Its the Economy, Stupid!"). There are potentially at least 3 problems with employees involved: negligence, crookedness, and competence. I want to expand on the last of these, "competence", since, unlike the other 2 problems, I do not believe that it can be corrected. The financial industry has failed to absorb the lessons of the last 100 years concerning financial instruments. Taleb's "Black Swan" addresses this failure as does Fox's "The Myth of the Rational Market". Those executives/economists/technocrats unfamiliar with the ideas in those works should be removed forever from the industry. That means most of them. Why? Because they are ineducable - their entire training is based on defunct financial models. The finance industry must be rebuilt from the bottom up with more robust models. But I don't expect such real reform (of either sort: the burnings or the education). Instead I expect the same damn thing, another financial meltdown, to happen yet again within the next decade. Perhaps then some crazed financial Savanarola will be able to arouse the crowds to a passionate frenzy over the trillions lost. Maybe then heads will fall and true change will take place.

crag 15y ago

These lawsuits are to recoup some of the loses incurred by issuing FHA loans (Frannie and Freddie). Both agencies were mislead by the various banks. Who did everything they could to issue "FHA"loans. Both agencies relied (and they still do) on the banks writing the loan to verify credit worthiness. Which of course, the banks didn't. They were making too much money. It was a win win for the bank. Cause when the bottom fell out of the housing market Freddie and Frannie were left holding the bag - in other words, the taxpayers. Add that on top of that, TARP, and the banks walked away making trillions. It was the biggest heist in history. And perfectly legal, in the US. The case will probably be settled. Banks will pay like 20 billion (or so) and we're all forget it in a week.

crag 15y ago
I wanna add something.. there is one saving grace in all this mess; investors, AIG, countries, other banks; are all suing each other. BofA is facing 4 major lawsuits which could cost it billons (total I think is 80 billion). That alone might bring down the bank. But the more likely senario is that our government will once again step in to bail BofA out. Now that would cause a HUGE fight in Washington. But you know, the biggest statement you can make is to pull your money out of bofA (and the others). Find a credit union or a local bank. You are insured up to $250,000 per account in any US bank. So you don't have to do business with the big players. They don't care about you anyway. They just want your deposits.
- mdda 15y ago
  But everyone suing everyone else doesn't help anyone apart from the lawyers. And the fights in Washington are utterly unproductive. In order for job creation to take place, the USA needs less volatility rather than more : If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...
  - crag 15y ago
    Completely agree. But tell that to your elected officials.

victoro 15y ago

This may be a gross oversimplification, but I don't get it: First the government bails out the large banks to the tune of 600 billion (give or take a few billion), 3 years ago. Now they realize that the banks were perpetrating fraud in the first place and decide to spend potentially millions (or maybe even hundreds of millions) along with the precious time of the already over-booked and underfunded federal court system to sue them. All to get some small fraction of the money that they gave to the banks back. And the banks will probably be using money the government gave them (some of that 600 billion had to last until now right?) to pay for their defense. Is this all basically an elaborate money laundering scheme for government lawyers, or just an expensive case of the US government being indian givers?

RuadhanMc 15y ago
I think people tend to forget that the banks were bailed out because if they weren't then the world's financial system would have shriveled up and died -- remember the credit markets had actually ceased to function and as a result no one could borrow money. Credit markets and the shadow banking system http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Credit_markets_and_the_shadow_banking_system http://en.wikipedia.org/wiki/Late-2000s_financial_crisis#Cre... I haven't seen any credible arguments against bailing out the bank which would have ensured that the financial system didn't completely collapse. Some argue that we should have let the crisis take its own course, let the banks fail and deal with the consequences. But this would have guaranteed a second great depression and the vast majority of the world would have been negatively affected in a very bad way. Now without congress actually doing anything against the banks there aren't too many options left, but hopefully the banks being sued can keep this issue in the spotlight longer to encourage public rage, so that Congress is actually forced to do something of significance.
- giardini 15y ago
  >But this would have guaranteed a second great depression and the vast majority of the world would have been negatively affected in a very bad way. But we are in a recession as deep as the Great Depression! And there are obvious undeserving winners (Wall Street) and losers (everyone who worked hard, paid their bills on time, invested conservatively, and saved money).

ck2 15y ago

But not one single executive who made the actual decisions will serve a single day in prison.

georgehaake 15y ago

Put people in jail.