But word of a looming litigation motherlode emerged yesterday in The Wall Street Journal. A bank in Seattle has filed 11 separate lawsuits against J.P. Morgan Chase , Goldman Sachs , Morgan Stanley , Bank of America and other usual suspects for the sin of selling it some $4 billion in mortgage-backed securities in the housing bubble.
The suits filed by Federal Home Loan Bank of Seattle seek to force the big Wall Street firms to buy back the damaged goods (at the original list price, no doubt), essentially alleging the sellers staged an elaborate rip-off.
“The breadth of the suits is unusual and is among the first of substantial size by an investor in mortgage-backed securities,” The Journal notes. “A ruling against the firms would ‘start a stampede’ by other investors.”
And that's the problem. Was the Seattle bank truly a naïve and unwitting victim whose only redress lies in court? Even though it is a federally chartered co-op jointly owned by the 375 local banks and S&L’s it serves? Or is the bank, instead, a sore loser with only itself to blame for making a bad bet on overheated MBS just as the bubble was about to burst?
Turns out the bulk of that $4 billion went to bonds based on the very worst and wobbliest mortgages you could find: Alt-A "liar loans" and subprime debt. Shouldn't a Federal Home Loan bank have known better?
As for the big banks that sold the mortgage bonds: It is extremely doubtful that they sold with malevolent intent aimed at fleecing their clients; otherwise the banks themselves wouldn’t have swallowed a trillion dollars in losses on MBS and other exotic, wildly leveraged instruments.
A victory for the Seattle bank would be a clarion call for legions of "victims"—hedge funds, private-equity funds, pension plans, fatcats and other savvy investors who shudda known better—to demand recompense for their pain and suffering.
They willfully, knowingly took on higher risk to get the fatter returns that mortgage securities offered. No wussie, low-risk T-bills for them. Now, when the meltdown cometh, they're shocked--shocked!—that risk hath smited them.
The trial lawyers could stoke a legal onslaught by these poor, put-upon casualties of the meltdown. They don't have to pay the other side's legal fees even when they lose an utterly ridiculous case, so the cost of entering this legal lottery is more than manageable.
Instead of taking responsibility, we search for someone else to blame. It’s the American Way. So why stop at the banks?
Let’s sue the real estate agent who sold the home, the bank that made the mortgage, and the overleveraged homebuyer who took it. Not to mention the Wall Street firm that transmogrified the mortgage into a tranch of bonds, the credit agency that blessed the bonds with a triple-A rating, the salesmen who sold the bonds to investors, the hedge fund that bought ’em, and the pension plan that invested in the hedge fund on our behalf.
Hey! Let’s have the big banks that structured and sold MBS sue themselves for their own huge losses! That’ll really teach ’em.
The only winner in all this: the lawyers. It won’t make us feel any better. It won’t help us do a better job of reining in the risk of credit default swaps and blown-up mortgage bonds. It will, instead, send banks into the bunker and exact money from them to pay “victims,” some of whom own shares in those same companies. Robbing Peter to pay ... Peter.
Maybe the feds should offer an IRS-style amnesty to all those tainted by the MBS mess: Pay up now into an agreed-upon sum, Wall Street, and we’ll insulate you from all lawsuits spawned by our financial brush with death.
The self-styled “sheriff of Wall Street,” the now-disgraced former New York Gov. Eliot Spitzer, had Merrill Lynch pay $100 million to settle the flap over analyst/investment banking conflicts after the Tech Wreck in 2000. Maybe we should tag the Top 10 banks at $100 milliion a pop, collect a billion, short-circuit the plaintiff’s bar and be done with it.
For my part, though, I’d hate that solution, because in most cases the buyers of MBS aren’t unwitting victims, and they don’t deserve any legal remedy at all. You pays your money and you takes your chances … and in most cases, no illegal intent was involved—everybody blew it on this one.
This investor victimization will hurt the recovery and distract us from making the right fixes. It ignores a bitter truth: If you got ripped off, chances are you bear some of the blame. Any good flim-flam requires the complicity of the victim.
- Follow Kneale at twitter.com/denniskneale