Home—Blog—Why the US is right to sue its own big banks
Sep 02, 2011, 01:57
Posted byMerryn Somerset Webb
Comments (9)
I’ve been on BBC World talking about the business of the US suing its own big banks for misrepresenting the quality of the mortgages they both issued and then securitised to sell on at the height of the US housing bubble.
They’ll argue, says the New York Times, which reported the story, that the banks failed to perform with due diligence required under securities law while assembling and selling the mortgage securities, and missed signs that borrowers’ incomes were inflated or falsified.
And they want $30bn or so in compensation. That’s serious money. Which, of course, is why bank shares immediately slumped in the US.
But should the US – on behalf of Freddie and Fannie Mac in this case – really be going ahead with this kind of case? After all, the number of people responsible for the sub-prime debacle and consequent global financial crisis goes far beyond the banks.
There were the central bankers and their insistence on failing to recognise the shifting dynamic of global inflation, and of keeping monetary policy far too loose. There were the politicians who were determined to work things so that as many people as possible ended up owning their own homes, regardless of the risks inherent in doing so. There were the mortgage brokers who actually falsified the documents to keep things going. And of course, the general population – the ones who took out the mortgages they must have known they couldn’t actually repay. Everyone played their part in the 'house prices never fall' game.
It is also the case that the banks remain very, very fragile. £30bn might push them back over the edge again, meaning that the government’s lawsuit leads to another government bail-out. Make the banks pay and everyone pays. Not only might the taxpayer end up on the hook again, but any fines will inevitably be passed on to the customers in higher charges. Then there are the pension funds and so on holding shares in the banks. Anything that pushes their share prices down (as even the news of a lawsuit has) hurts them.
Add it all up and you can make a reasonable case for letting the whole thing go. Everyone behaved badly, said another of the guests on BBC World this morning. “Let’s just move on.”
But I’m not so sure we should. There is plenty of evidence that there was fraud involved in the whole debacle and the idea that justice shouldn’t be done because justice can have nasty consequences is not a good one. As is the fact that you shouldn’t aim to punish one guilty party because you can’t punish them all – the US is never going to sue the Federal Reserve or its own politicians, much as perhaps it should.
And when you hear the banks protesting that the world will end if they are ever penalised for anything, note that they say this every time anyone suggests any reasonable step towards improving the ethics of the financial industry. In an ideal world we would bring cases against all the individuals involved, or at least find a way to retrospectively cut the gains they made from sub prime. But that hasn’t proved to be possible so far.
So it seems to me that this case is a necessary one. Sure, it will end with the banks getting a much lesser fine than mooted at the moment, and as such won’t in any real sense punish anyone. But it could at least work to remind Wall Street that they have some fiduciary responsibility to act within a moral framework. Even more than that, seeing fraud proved and names named might make the rest of us feel better.
Then we can all move on.
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(02 September 2011, 08:33PM) Complain about this comment
You are completely correct Merryn. Fraud on a grand scale should not go unpunished. They will bleat, but we have a moral imperative to ensure at least some justice is done before they move on to the next big rip off.
(03 September 2011, 12:19PM) Complain about this comment
This lawsuit adds a very interesting dimension to the whole ringfencing discussion in the UK. If the US is willing to punish banks for past sins despite their (perpetually) "fragile" state, this puts more pressure on Cameron not to give in to brib-I mean lobbying from the UK financial industry...
(03 September 2011, 09:21PM) Complain about this comment
We have been betrayed by Politicians; bailing the Banksters out was the betrayal too far. Now we are crippled by debt and seemingly at the total mercy of the Banksters.And don't they know it. They treat us with utter contempt. To sue them won't hit their pockets; they'll up their charges to over compensate. It would be 'cutting off one's nose to spite one's face'. The betrayalists are our biggest enemy. They should be our prime target for reprisals. I'll say no more; I've said it all before!
(04 September 2011, 10:14AM) Complain about this comment
Incompetence is not a criminal offense but fraud is. If fines don't work may handing out a few custodial sentences will.
(04 September 2011, 10:53AM) Complain about this comment
This article misses the point entirely, the dangerous levels of leverage in the system are predominantly a result of individuals living beyond their means. Its easy to blame the banks but home owners falsifying mortgage applications and over borrowing is the root cause. Cheap credit is very welcome for people responsible enough to use it so why should we have a nanny state telling people what should be common sense ie don't borrow what you can't afford to pay back.
(04 September 2011, 03:05PM) Complain about this comment
#5 expert007. I think you are wrong. The leverage comes from the Banks overwillingness to lend and failure to do due diligence.They knew they could lend in a cavalier fashion as they had the implicit backing of free Government Insurance if it all went pear shaped (as it did).The value of these gaurantees has been costed at around £11 billion a year. Funnily enough that is exactly the level of the bank bonuses in their best years. Banks are a publicly funded license to print money for an elite clique. A clique the politicians are terrified of.
(04 September 2011, 10:24PM) Complain about this comment
I would love it if those bankers were forced to hand back some of their bonuses they earned while wrecking the economy, and some were sent to prison.However I expect the only people to make money out this process will be the lawyers, and it will ultimately be at the expense of the tax-payer.Also I am deeply mistrustful of the americans, when it comes to defending their own interests vs those of foreign companies/governments.
(05 September 2011, 01:19PM) Complain about this comment
The Banks were only doing what the Government encouraged and wanted them to do. If the Banks had been still required to complete monthly BofE returns of their liquidity position then the credit bubble would not have been allowed to develop. This however did not suit the Government who wanted the perceived benefits of free money creation.
(05 September 2011, 11:25PM) Complain about this comment
As Alistair Heath states in CityAM, this pursuit of the banks by the US government is "unintentionally hilarious".http://www.cityam.com/news-and-analysis/allister-heath/how-washington-created-sub-primeMr Heath includes all the pertinent facts needed to establish that the guilty party (in the housing bubble) is the US government itself with its false ideological pursuit of affirmative, yet ironic wealth destroying, actions.The banks were fully incentivised by the government to deliver mortgages to those ill-placed to afford repayments. And sadly taxpayers of the world are picking up the tab of irrational government policy once more.
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