WASHINGTON (MarketWatch) — A federal U.S. agency is ready to sue more than a dozen major banks, arguing that they misrepresented the quality of mortgage securities they put together and sold in the run-up to the bursting of the housing bubble, according to a published report.
The New York Times reported Friday that the Federal Housing Finance Agency, which oversees mortgage firms Fannie Mae and Freddie Mac, is expected to file the lawsuits in federal court Friday or Tuesday. The agency is expected to seek billions in compensation.
Goldman Sachs view on global economy
WSJ Money & Investing Editor Colin Barr joins Michael Casey to discuss Goldman Sachs taking a negative view of the global economy. They also discuss conflict of interest issues that have faced the bank. Photo: Chris Hondros/Getty Images
The suits are aimed at Bank of America Corp. BAC -6.57% , Goldman Sachs Group Inc. GS -2.64% , J.P. Morgan Chase & Co. JPM -2.62% , Deutsche Bank AG DE:DBK -4.33% DB -3.60% and others, the report said, citing three unidentified individuals briefed on the matter.
Separately, Bank of America was asked by the Federal Reserve to show what measures it could take if conditions were to worsen for the bank, according to a report in The Wall Street Journal. The bank responded by saying it could issue tracking shares in Merrill Lynch, the brokerage giant it acquired during the height of the financial crisis.
Meanwhile, the FHFA will argue that the banks failed to meet their due-diligence duties under securities law and failed to spot evidence that borrowers’ incomes were overstated or falsified, the report said. The securities backed by the mortgages quickly lost value when many borrowers proved unable to meet payments.
The lawsuits aim to secure reimbursement for losses on securities held by Fannie and Freddie. Private investors have attempted to force banks to buy back mortgage-backed bonds.
The FHFA previously had said it was considering such lawsuits when it sued UBS over $4.5 billion in mortgages in July. See story on FHFA’s suit over $4.5 billion of mortgages.
The report sent Asian and European equity markets lower and was weighing on U.S. stock futures, though markets also were impacted by a report showing no new jobs were created in August. See indications.
“The U.S. banking sector has already suffered a massive loss of confidence and remains incredibly fragile,” said Kathleen Brooks, research director at Forex.com, in emailed comments. “This lawsuit and the massive sums involved may aggravate the problem and cause another leg lower in the financial sector.”
Spokespersons for Bank of America, Goldman Sachs and J.P. Morgan declined comment, the report said.
Spokespersons for the banks weren’t immediately available Friday to respond to requests for comment on the story.
A spokesman for Deutsche Bank told the newspaper that the bank “can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”
The report noted that financial executives have privately argued that losses on mortgage-backed securities were the result of a broad downturn in the economy and the housing market rather than how the mortgage securities were structured.
William L. Watts is a reporter for MarketWatch in Frankfurt.
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