Frivolous lawsuits - as American as baseball and apple pie.
It was announced today that the US government, on behalf of mortgage insuring agencies Fannie Mae and Freddie Mac, is suing a dozen banks for billions of dollars. The lawsuit alleges that these banks were aware of the bad quality of their securitized mortgage products (mortgages lumped together and sold as bonds) of years past, and that the government should therefore be compensated for losses.
Of course the banks knew about the bad quality of the loans within their securitized mortgage products. But then, so did Fannie Mae and Freddie Mac, so did the government – and so did everyone else.
Presently, insurer AIG says it didn't know about the bad quality of the loans it bought from the banks. The government agencies (ex. Fannie and Freddie) reviewing and approving these mortgages say they didn't know about the bad quality of the loans - even though it was the government who encouraged the banks to do more low-quality low-income loans in the first place. The credit ratings agencies (ex. S&P) say they didn't know about the bad quality of the loans, even though it is their job to investigate loans thoroughly before rating them. And of course, the banks say they didn't know about the bad quality of the loans they were buying from the mortgage brokers. How is all this possible?
In truth, everyone knew how bad these loans were. In fact, when securitizing loans (selling them as bonds), the worst quality loans from one part of the country were intentionally mixed in with the best ones from other parts of the country. The theory was that although one area might experience a decline in home values, it was unlikely to happen to the entire country. Therefore, the securitized mortgages were considered “safe and good,” at least, as long as the economy was doing well.
If the economy slowed, low-quality mortgages could default. Few foresaw, however, that entire neighborhoods would sink, and that good quality loans would default almost as often as the bad ones. The collapse of the housing market was considered a “black swan event” that highly-paid quantitative analysts had been saying was next to impossible. Obviously they were both wrong and overpaid.
Interestingly, the only people not being sued are the people who deserve it most - people who knowingly overstated their incomes to buy houses they couldn't afford, as well as the friends, neighbors and brokers who encouraged them to do it.
As a banker, I often see people take stupid risks, and then try to shift blame when it doesn’t work out. They invest in stocks or funds that are highly risky (despite warnings), then blame their investment advisors when values fall. They take out money repeatedly from bank machines at the casino, then try to say it wasn’t them and that their money should be returned. Few people are willing to accept responsibility for their own stupidity. Few people realize that the reason they failed is because they actually wanted to fail (for more on this, see my book, The Intelligent Investor’s Mind).
The homeowners who lied about their incomes and employers, faked employment letters, and made mortgage payments from their credit cards etc. should lose everything and shut up about it. They took a gamble and lost.
Companies will sue and counter-sue, settle out of court, and hopefully that will be the end of this nonsense.
____
"Just think of how stupid the average person is, and then realize half of them are even stupider!"
George Carlin
____
