Last Updated Sep 5, 2011 10:47 AM EDT
No, no one's going to jail, sorry to say, but the U.S. on Friday slapped lawsuits on 17 big banks for selling mortgage securities marketed as prime rib that turned out to be tripe.
The Federal Housing Finance Agency (FHFA), which overseas crippled mortgage giants Fannie Mae and Freddie Mac, claims the Wall Street firms sold nearly $200 billion in risky home loans to the mortgage companies without adequately disclosing their risks.
The suits claim Bank of America (BAC), Citigroup (C), Barclays (BCS), Goldman Sachs (GS), HSBC (HBC) and Nomura (NMR), among many others, misrepresented the quality of the mortgage securities they created and sold during the housing bubble.
Remember -- the mortgage game changed in the years leading up to the crash. Instead of lending people money to buy a house and holding on to the loan, banks acted as middlemen, selling those loans to investors. With no skin in the game, they stopped worrying about whether the borrower could actually afford to make the payments, or if the house was worth the price.
So of course those mortgage securities soured when the housing bubble burst. Investors who had bought the loans got creamed, including Fannie Mae and Freddie Mac, which suffered $30 billion in losses. That expense was almost entirely borne by taxpayers.
FHFA's action isn't exactly the kind of vengeance Main Street understandably wishes on Wall Street. Lawsuits aren't criminal complaints. Besides, apart from creating more work for lawyers, the latest legal challenges do nothing to improve the fortunes of regular folks.
To put the new claims in context, the FHFA has already sued UBS (UBS) for $900 million over the sale of subprime mortgage securities -- a suit the Swiss bank says it will fight tooth and nail. AIG (AIG), meanwhile, is suing Bank of America over much the same thing. And all 50 state attorneys general are working on a settlement with Bank of America, Citigroup (C) and JPMorgan Chase (JPM) over bad mortgage securities.
Plus, the FHFA's series of lawsuits could hamper a broader government settlement with banks already in the works, Reuters reported.
So, while it's nice the legal merry-go-round is gaining steam, it took three years after the collapse of Lehman Brothers for the feds to really get in the game. Given the Bleak House nature of the legal system and the resources Wall Street commands, we can expect it to be many more years before all settlements or judgements are reached.
The global financial system nearly collapsed in 2008 largely because investors from California to Norway piled into debt securities that were supposed to be safe. Instead, they were toxic. From Main Street's perspective, this switcheroo touched off a recession with no end in sight. Just have a look at the latest unemployment report, which shows no new job creation last month.
As good as it might feel to see the feds go after Wall Street, it's not going to put anyone back to work, stem foreclosures or raise an underwater mortgage back to the surface. As for holding Wall Street accountable, we're more at the end of the beginning than the beginning of the end.
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