September 5, 2011: A bruising legal fight pitting the country’s most powerful banks against the full force of the United States government began Friday, as federal regulators filed suits against 17 financial institutions that sold the mortgage giants Fannie Mae and Freddie Mac nearly $200 billion in mortgage-backed securities that later soured.
The suits are the latest legal salvo fired at the banks accusing them of misdeeds during the housing boom. Investors fled financial shares Friday amid growing concern that the litigation could last for years and undermine earnings and balance sheets in the process.
The litigation represents a more intense effort by the federal government to go after the financial services industry for its supposed mortgage failures.
Indeed, the cases were brought on the basis of 64 subpoenas issued a year ago, giving the government an edge in its investigation that private investors suing the banks lack.
The Obama administration as well as regulators like the Federal Reserve have been criticized for going too easy on the banks, which benefited from a $700 billion bailout package shortly after the collapse of Lehman Brothers in the autumn 2008.
In addition to suing the companies, the complaints also identified individuals at many institutions responsible for the machinery of turning subprime mortgages into securities that somehow earned a AAA grade from the rating agencies.
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.” In spite of that warning, Bank of America said, the government-controlled mortgage giants “are now seeking to hold other market participants responsible for their losses.”