U.S. regulator sues major banks over subprime bonds
A U.S. regulator sued 17 large banks and financial institutions on Friday over losses on about $200 billion of subprime bonds, which may hamper a broader government settlement of the mortgage mess left over from the housing crisis.

The lawsuits by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, surprised investors, dragging down bank shares and could add billions of dollars of legal costs at perhaps the worst possible time for the industry.

Friday's lawsuits reflects how different parties, including investors, banks and different government groups are fighting over who should bear losses from a housing crisis that in 2008 drove the economy into its worst recession in decades.

The FHFA accused Bank of America and its Countrywide and Merrill Lynch units, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Scotland Group Plc and others of misrepresenting the checks they had done on mortgages before bundling them into securities.

According to the lawsuits, the securities should have never been sold because the underlying mortgages did not meet investors' criteria. As more borrowers fell behind or went into foreclosure, the securities' value fell, causing losses.

Nearly all the banks that were sued declined to comment or were not immediately available for comment. Others called the charges unfounded.

"Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more," said Mayura Hooper, a spokeswoman for defendant Deutsche Bank AG, in a statement.

A Bank of America spokesman said Fannie Mae and Freddie Mac are trying to shift responsibility to banks after earlier blaming losses on other factors. A spokesman for Ally Financial Inc, once known as GMAC, called the FHFA claims "meritless."

Bank of America faces three FHFA lawsuits, covering losses on more than $57 billion of securities. JPMorgan faces claims related to $33 billion of securities and Royal Bank of Scotland was sued over $30.4 billion of securities.

Several large banks are also negotiating with all 50 U.S. state attorneys general on a comprehensive settlement to address mortgage abuses and limit future mortgage litigation.

"This new litigation could disrupt the AG settlement," said Anthony Sanders, finance professor at George Mason University and a former mortgage bond strategist.

Banks might resist settling if they knew litigation from other regulators could deplete capital, he said. Before the FHFA lawsuits had even hit a court docket, financial experts offered blunt expectations for the outcome.

"The lawsuits will be settled," said Sean Egan, managing director of Egan-Jones Ratings Co, an independent credit ratings firm. "The end result will be a further outflow of cash from the banks, and more importantly an additional black eye."

Source: Reuters
Date: 03.09.2011 [304]