Saturday, September 3, 2011

U.S. Government to Sue 17 Financial Firms Over Home Loans

"The top federal housing regulator filed lawsuits on Friday against 17 of the world's biggest financial institutions, saying they sold $196 billion of risky home loans over four years to Fannie Mae and Freddie Mac without adequately disclosing the risks.

The suits, filed by the Federal Housing Finance Agency, represent the most sweeping action to date from a federal regulator stemming from the mortgage meltdown, which brought the financial system to its knees in the fall of 2008 and helped push the economy into a deep recession." (1)

"Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.

The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion." (2)

Milton Friedman stated many times that legal recourse is one of those checks and balances within free enterprise/free markets to weed out the unscrupulous.

In this particular case exactly where is the root problem? Does legal action need taken to root out the source of the problem or the problem's results?

In John B. Taylor's book Getting Off Track he makes a very convincing argument that the government itself set the stage for financial shenanigans. (3) The community reinvestment act, the Clinton Administration's aim to raise the percentage of home ownership, the lowering of standards for a loan application approval (which was government directed), etc., along with the cheap money bubble created in 2003-2004 by the Fed [government] set the stage for the financial shenanigans that followed. Stated alternatively, no government intervention in the housing market and no government induced cheap money bubble then no stage is set for financial shenanigans. If one sets the stage for financial shenanigans then one should be surprised to find financial shenanigans?!?

Secondly, the residential housing sector is in a depression. Partly due to the above phenomena and also due to the government directing way too many resources into a single sector (residential housing) via the aid of the tax code. Hence suing lenders is going to help the housing market -or- is suing lenders merely blaming some entities for the housing market depression?

Most importantly, how does this action solve the current economic malaise?


(1) U.S. Sues Big Banks Over Home Mortgages, Wall Street Journal, 09/02/2011

(2) Feds sue big banks over sales of risky investments, Yahoo Finance, 09/02/2011

(3) Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. John B. Taylor, Hoover Institution Press, February, 2009.

No comments:

Post a Comment