Lawsuits: Big Banks Defrauded Taxpayers for $200 Billion

Some of the world’s largest banks defrauded U.S. taxpayers out of almost $200 billion by lying about the quality of mortgage-based investments, according to lawsuits filed on Friday by federal regulators. The suits will likely take years to resolve, and could cost the banks tens of billions of dollars in repayments and fines.

By misrepresenting or omitting basic facts about millions of American mortgages, including homeowners’ incomes and whether or not the buyers lived in the homes, the institutions allegedly tricked taxpayer-backed companies into believing that high-risk investments were safe.

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“Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans,” according to the lawsuit against Bank of America, one of 17 similar suits filed on the same day. “(T)hese statements were materially false.”

Taken together, the lawsuits allege that 17 financial institutions fraudulently sold $196.1 billion worth of mortgage-backed investments to Fannie Mae and Freddie Mac, two taxpayer-owned companies went bankrupt in 2008, largely as a result of their investments in subprime mortgages.

The suits were filed by the Federal Housing Finance Agency, the federal regulatory agency in charge of both companies.

The FHFA did not say how much money in damages and fines it would seek from each company, instead leaving it up to the courts to award damages “in an amount to be determined at trial.”

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But the agency did cite a similar lawsuit it filed against UBS Americas, Inc. in July. In that case, Fannie and Freddie purchased $4.5 billion worth of allegedly fraudulent mortgage-based securities from UBS. Regulators are trying to get $900 million back, or about 20%.

If that same ratio holds for the sweeping lawsuits filed on Friday, the 17 major banks could face about $39 billion in potential paybacks. That’s obviously a lot of money, but it pales in comparison to the cost of bailing out both companies, which so far has cost taxpayers $153 billion, and by 2013 could cost $363 billion, according to a report by FHFA.

Bank of America faces the largest potential tab. The bank itself sold $6 billion worth of mortgage-based investments to Fannie and Freddie during the housing boom.

But after the crash, BofA purchased Countrywide, as well as Merrill Lynch and its subsidiary First Franklin Corp. Countrywide and First Franklin were among the largest sellers of subprime mortgages during the lending spree of the mid-2000s. The two companies sold a combined $51.4 billon in mortgage-backed investments to Fannie and Freddie, according to the lawsuits.

If the federal government seeks to gain back 20% of its losses, that would mean am $11.48-billion bill for Bank of America.

Most of the banks did not respond to news of the lawsuits. One that did, Bank of America, tested an argument that we will probably be hearing often as these cases wend through the judicial system in coming years: That Fannie and Freddie are both highly sophisticated investors. Both companies were warned about the risks involved in mortgage-backed securities, and both chose to ignore those warnings in pursuit of profits.

Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so,” Bank of America said in a statement to reporters. “Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses.”

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Here’s a list of the 17 institutions facing lawsuits, followed by the amounts that Fannie and Freddie paid each one for mortgage-backed securities:

Ally – $6 billion
Bank of America – $6 billion. Plus its subsidiaries:
- Countrywide – $26.6 billion
- Merrill Lynch/First Franklin – $24.8 billion
Barclay’s $4.9 billion
Citigroup $3.5 billion
Credit Suisse – $14.1 billion
Deutsche Bank – $14.2 billion
First Horizon National – $882 million
General Electric – $549 million
Goldman Sachs – $11.1 billion
HSBC – $6.2 billion
JP Morgan Chase – $33 billion
Morgan Stanley – $10.58 billion
Nomura Holding America Inc – $2 billion
Royal Bank of Scotland – $30.4 billion
Societe Generale – $1.3 billion