Too big to fail...too big to sue?

September 1, 2011 7:47 PM

TARP is winding down...bring on the lawsuits. Within the next week, the US government is set to sue a dozen banks for billions in losses caused by those banks' misrepresenting the risks of mortgage-backed securities. This is in addition to numerous State Attorneys General suing the banks for failing to reach an agreement in foreclosure abuses. Insurance giant AIG will also be suing BofA to recoup losses over the mortgage bonds. BofA had also agreed to a settlement of $8.5 billion to cover losses from soured mortgage debt issued through Countrywide. Deutsche Bank is suing WaMu. Goldman Sachs already settled with the SEC for $500 million for their fraud and have been sued by othersseeking to recover losses.

The settlements of these suits may run into the tens of billions of dollars and have a major impact on banking sector profitability for years to come. Privately, bank officials "also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy."

posted by darkstar (56 comments total)

Yay for the American people lawyers!
posted by Revvy at 7:56 PM on September 1, 2011

Goldman settling with the SEC for $500 million is like me totaling your Ferrari and then handing you a Hallmark apology card and a wrinkled 5-dollar bill. That number is so low it's an insult.

Of course, at this point, the only thing that would make me happy would be heads on pikes up and down Wall Street.
posted by BitterOldPunk at 7:57 PM on September 1, 2011 [58 favorites]

Yet at the end of the day, all of the same rich people will be rich, and all of the same poor people will be poor.
posted by tylerkaraszewski at 8:01 PM on September 1, 2011 [8 favorites]

And all the individual American will see is banks raise their interest rates and fees to make up for it all.
posted by SirOmega at 8:02 PM on September 1, 2011 [6 favorites]

Privately, bank officials "also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy."

I see. I don't want to sue anyone. What I would like, after many years of paying my mortgage and property taxes and insurance and being a generally OK citizen, is to get the $25,000 in equity back that just fucking VANISHED -- poof! -- thanks to the criminal enterprise of banks + appraisers + realtors and their government sugar daddies, thus making it impossible for me to borrow a few lousy bucks that were 100% earmarked for making improvements to the property, which would, you know, raise the value of the bank's investment and put money into the local economy.

So privately, bank officials can just shut their pieholes and take their god damn lumps.
posted by FelliniBlank at 8:04 PM on September 1, 2011 [19 favorites]

Within the next week, the US government is set to sue a dozen banks for billions in losses caused by those banks' misrepresenting the risks of mortgage-backed securities.

Sued? Why not prosecuted? I wonder if Waterfall TALF Opportunity. will get sued.
posted by delmoi at 8:05 PM on September 1, 2011 [2 favorites]

Privately, bank officials "also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy."

And they say we don't negotiate with terrorists.
posted by clockzero at 8:15 PM on September 1, 2011 [34 favorites]

...and yet, it's still chump change, compared to how much they all bilked out of us.
posted by markkraft at 8:28 PM on September 1, 2011 [1 favorite]

An interesting (and integral) piece of this story is the dismissal of NY State Attorney General Eric Schneiderman from the committee of attorneys general investigating the banks' actions.
posted by brina at 8:30 PM on September 1, 2011 [2 favorites]

is to get the $25,000 in equity back that just fucking VANISHED

Wait -- so you wish your house was worth more, so that the banks would loan you money to make improvements, in order to make your house worth more? If so, you do not understand the housing bubble.
posted by blargerz at 8:32 PM on September 1, 2011 [13 favorites]

Deutsche Bank is suing WaMu

I thought WaMu went under and was bailed out — that is, there's nothing to sue, right?
posted by Blazecock Pileon at 8:38 PM on September 1, 2011

I hate every single aspect of this whole issue.
posted by XhaustedProphet at 8:46 PM on September 1, 2011 [4 favorites]

Wait -- so you wish your house was worth more, so that the banks would loan you money to make improvements, in order to make your house worth more? If so, you do not understand the housing bubble.

blargerz, some of us want to make needed improvements: roofs need redone, painting or siding for exterior upkeep, well pumps or toilets need replaced--there's a lot of upkeep in owing a house, and not everyone can afford $8000 to replace a roof out of pocket. Sometimes you need to upgrade a bathroom or kitchen just to keep the value high.

Others of us have lived in a house for 30 years and plan on continuing to stay here. We're the ones that like to make improvements to suit our lifestyle. I'd like to finish the mudroom and half-bath we started.

Sometimes you just gotta spend money on a house.
posted by BlueHorse at 8:49 PM on September 1, 2011

is to get the $25,000 in equity back that just fucking VANISHED

Wait -- so you wish your house was worth more, so that the banks would loan you money to make improvements, in order to make your house worth more? If so, you do not understand the housing bubble.

How about those of us that were not using our home equity to get loans? Who just wanted their house to be worth enough that we can sell it if we decide to move? Who bought long ago when house prices were much more sensible, yet are now on the verge of being underwater thanks to the housing crash? (Yes, it's that bad out here.)

Maybe we do understand the housing bubble and it just happens that some of us who weren't using our houses as ATMs are a little bitter at being screwed over so badly.
posted by azpenguin at 8:52 PM on September 1, 2011 [10 favorites]

So the reanimated FrankenFreddieFannie agency is suing the banks for selling them crap. Who is suing FreddieFannie for hiding the fact that they were insolvent?

We can just swap out all the incarcerated small-time drug users with these guys -- we don't even have to piss off the private prison companies.
posted by RobotVoodooPower at 8:53 PM on September 1, 2011 [2 favorites]

Not to continue the derail, but I think the point is that your equity vanishing is a sign that the equity was illusory. If the rational selling price of your house dropped, your house was over-valued. Such is life in a bubble.
posted by introp at 8:54 PM on September 1, 2011 [2 favorites]

I see. I don't want to sue anyone. What I would like, after many years of paying my mortgage and property taxes and insurance and being a generally OK citizen, is to get the $25,000 in equity back that just fucking VANISHED

$25,000? Shit, I want my $215,000 back that I've lost, both on paper and equity, since I bought my house (bought at $390K, down to $175K now, upside down over $100K). Suffice to say, I'm not holding my breath.

At this point I'd settle for being able to refinance my current underwater debt at the current ridiculously low rates. I could convert from 30 yr fixed to 15 yr fixed, my payment would only go up $135/mo (luckily thats not an issue for me), and I'd pay a lot less interest over the next 15 years until I'm either paid off or no longer under water. I'd assume most people would refi and restart the 30-year clock and take the extra cash in their pocket (a few hundred a month).

I'd love for Fannie Mae to write down my loan to what my house is worth and enter into an agreement that they'd get 94% of all appreciation from here until they're repaid, minus any capital improvements on my behalf (e.g. solar panels, heat pump, etc), but that wouldn't fly no matter how much it might get the economy going again.
posted by SirOmega at 8:55 PM on September 1, 2011 [3 favorites]

Yet at the end of the day, all of the same rich people will be rich, and all of the same poor people will be poor.

Nope, there's more of us every day:

nytimes: White House Expects Persistently High Unemployment
posted by ennui.bz at 8:58 PM on September 1, 2011

that's nytimes: White House Expects Persistently High Unemployment
posted by ennui.bz at 8:58 PM on September 1, 2011 [1 favorite]

"Nope, there's more of us every day"

I made no claim as to the fate of those who are currently neither rich nor poor.
posted by tylerkaraszewski at 8:59 PM on September 1, 2011

Shit, I want my $215,000 back that I've lost, both on paper and equity, since I bought my house (bought at $390K, down to $175K now, upside down over $100K)

Then why are you throwing good money after bad?

If the situation was reversed, the bank would walk away from that losing investment in a heartbeat. And yet, you insist on making payments on it. The reason the banks are fucking you is that you are letting them.

Hint: If you live in a no-recourse state, treat the banks as they treat you. Rent a place. Move. Then stop making payments and use that money for something useful. You won't have credit for seven years, but you'll have cash, and the bank will eat the loss.

If you keep throwing money at a losing investment, you eat the loss.

Remember: They told you that you needed to treat your house as an investment, and only an idiot invests their own money.

Walk away. The banks have spent a great deal of time telling you the old lie. It's not a home. It's a house. There are millions like them, and spending another $100K on one that's lost that much value is a sucker bet.
posted by eriko at 9:09 PM on September 1, 2011 [11 favorites]

From the first link: "The suits will argue the banks ... missed evidence that borrowers’ incomes were inflated or falsified".

Did they not understand what "liar loans" implies? Because that term has been used for over a decade, and liar loans were blamed for the last housing bubble.
posted by Joe in Australia at 9:15 PM on September 1, 2011

Remember the SEC is only one regulatory agency. FHA, Fannie and Freddy, 50 State AGs, plus lots of private investors all get their whacks at the bank. The SEC fine is like the traffic ticket you get when crashing the Ferarri, not the repair bills and the other liabilities.
posted by humanfont at 9:19 PM on September 1, 2011 [2 favorites]

How about those of us that were not using our home equity to get loans? Who just wanted their house to be worth enough that we can sell it if we decide to move?

$25,000? Shit, I want my $215,000 back that I've lost, both on paper and equity, since I bought my house

I know a way to jack up appraised values and make you rich again: Let's reinflate the bubble. A real big, good bubble. With plenty of scams and fraud. Yep, that gets 'em juicy. Everyone will time it right this time, yes? Buy low, sell high?
posted by blargerz at 9:38 PM on September 1, 2011 [4 favorites]

"Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure."

More on this from Matt Taibbi: Obama Goes All Out For Dirty Banker Deal
posted by homunculus at 9:39 PM on September 1, 2011 [1 favorite]

Remember the SEC is only one regulatory agency.

And not a trustworthy one at that.
posted by homunculus at 9:41 PM on September 1, 2011

Hint: If you live in a no-recourse state, treat the banks as they treat you. Rent a place. Move. Then stop making payments and use that money for something useful. You won't have credit for seven years, but you'll have cash, and the bank will eat the loss.

If you keep throwing money at a losing investment, you eat the loss.

Not only do I live in a recourse state and have a recourse loan, I also am (just barely) net positive with all my cash and assets. In other words, if I walk away, some simple research on behalf of the bank into my situation means the bank takes all my money and retirement.
posted by SirOmega at 9:59 PM on September 1, 2011 [2 favorites]

I agree with the banks for once. We don't need more suits and settlements, we need 1000s of criminal convictions a la the S&L crisis.
posted by benzenedream at 10:47 PM on September 1, 2011 [1 favorite]

Goldman settling with the SEC for $500 million is like me totaling your Ferrari and then handing you a Hallmark apology card and a wrinkled 5-dollar bill. That number is so low it's an insult.

Uh, one of the linked articles says the US is seeking 30 billion from these banks, including Goldman Sachs.

There's a reason GS lost 11 billion in value the day the related settlement of $500 million was announced. Read the article.
posted by Ironmouth at 10:57 PM on September 1, 2011 [1 favorite]

What Sweden did during its banking crisis, in 1992.
posted by Vibrissae at 11:13 PM on September 1, 2011 [3 favorites]

Sir Omega, you may wish to review whether your retirement would be protected. In most cases retirement funds are protected even on recourse loans. Naturally, I do not know your circumstances, but it would be worth checking with an attorney I imagine. Not recommending default, but just good for you to know all the facts.
posted by jcworth at 11:15 PM on September 1, 2011

Meanwhile, the number of "troubled banks" insured by the FDIC continues to rise.

"... The number of Problem Banks has increased steadily since 2007 and now totals 888 banks or almost 12% of all FDIC insured institutions. With the economy weakening and property values declining, most Problem Banks find it impossible to raise the additional capital required to meet minimum regulatory capital ratios. It would not be surprising to see the list of Problem Banks continue to expand in the future. ..."

In the U.S., our problem is that the U.S. real estate bubble was so big, so internationalized, and so deeply sold into the very financial structure of not only this nation, but Europe and Asia, that unwinding it is proving damn near impossible, without the incredible pain of an actual deep economic depression, that wipes out a lot (trillions of dollars, if not tens of trillions of dollars) of book capital in the form of MBS and other derivatives, and resets values on underlying real estate assets. Some estimates insist that something like the worst 300 banks on the above list have something like 1 trillion dollars of bad real estate related assets still on their books, exceeding their total capital structure by hundreds of billions of dollars, but that the FDIC can not find enough solvent banks in which to fold these zombie institutions, or find any other way by which they can, in the short term, return to normal profitability.

What happened in late 2008 was a lockup of the credit markets. What is likely going on now are the first crumblings of the U.S. government backed and insured banking system.

And believe me, if the FDIC, the Federal Reserve, or any other U.S. Federal agency could do a damn thing, systemically, to somehow change the numbers on the losses already recorded on bank balance sheets, much less those to come, they damn well would be doing it. Just as the Capitan of the Titantic spent the last 2 hours and 40 minutes of his life deeply regretting anything he did/didn't do, that contributed to hitting an iceberg...

What is at issue is whether they (the Fed, the Treasury, and the FDIC, and perhaps Congress and the Administration) can come up with some "plan" to spread out future losses of the continuing unwinding, so that only minimal capital is destroyed in the interim, and so that economic growth is not held down for decades.
posted by paulsc at 11:37 PM on September 1, 2011 [6 favorites]

I chose long ago to rent instead of buy. That wasn't a choice made of financial acumen: I just didn't think I'd be around long enough to have that kind of investment pay off. The worst ideal of the housing crisis is that it turns suicidal people into the foresighted and sane, conscientious people into suckers. For that alone, never mind everything else, the banks should be crucified without remorse.
posted by Errant at 12:35 AM on September 2, 2011 [5 favorites]

Paulsc sums up the problem well. It would be nice to call a timeout, hold massive trials, and jail a lot of people, but a bank holiday that lasted much longer than a week would start to yield results like ATMs not giving out any cash and cash hoarding. The high price gold is a symptom of this bunker mentality even in the markets. The financial sector still needs to be cleaned up, and it is being cleaned up, but quite slowly because the governments of the US, Europe, and some of the Asia-Pacific nations are essentially having to play Jenga with their financial systems. Having it seize up and stop working altogether would be a distinctly Bad Thing, and they're approaching the legal problems very delicately for the same reason that surgeons take a very delicate approach in removing brain tumors.

Mind you, from the point of view of a bank like GS, the experience is not delicate at all. More like a very bad never-ending day at the proctologist's office, based on what I've seen. Simply organizing the millions of documents they are having to produce to government investigators has kept several of my in-laws gainfully employed for going on 2 years now.
posted by anigbrowl at 12:35 AM on September 2, 2011 [1 favorite]

NYTimes: White House expects Perry presidency
posted by Avenger at 2:01 AM on September 2, 2011 [2 favorites]

This is not actually news - financial institutions have been suing one another of Reps and Warrantees since the first innings of the crisis. What's going on here is the the statute of limitations is coming up for Fannie and Freddie so they are rushing a ton of lawsuits out the door before that happens. This is part of why BAC shares have performed so poorly - they had attempted to tell people their R&W issue with the GSE's was taken care of. Guess not.

Some estimates insist that something like the worst 300 banks on the above list have something like 1 trillion dollars of bad real estate related assets still on their books, exceeding their total capital structure by hundreds of billions of dollars, but that the FDIC can not find enough solvent banks in which to fold these zombie institutions, or find any other way by which they can, in the short term, return to normal profitability.

Uh - no. The unofficial problem bank list has 984 names on, but total assets of 412 billion. So even if you said half their assets were in Real Estate loans - you've got 206 bil in real estate exposure. Then say half those loans went bad, 103 bil in bad loans, and then say you get 50% recoveries on that, and your trillion dollar capital hole is more like 50 bil. A lot of money, but not within shouting distance of a trillion dollars.
posted by JPD at 4:22 AM on September 2, 2011 [1 favorite]

ETA: Link to Calculated Risk post on current unofficial problem bank list
posted by JPD at 4:24 AM on September 2, 2011

Who cares? It's all just the same assholes playing the same games. You know how all Steve Jackson games are kind of the same? Ninja Burger : Munchkins :: banks ripping each other off : banks suing each other.

Only when there is an SEC with teeth will i believe things might change. And only when many, many assholes go to jail will I believe things are changing.

I ain't holding my breath.
posted by seanmpuckett at 4:32 AM on September 2, 2011

Privately, bank officials "also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy."

"Nice economy you've got there. It would be a shame if anything happened to it."
posted by stevis23 at 5:01 AM on September 2, 2011 [10 favorites]

I remember reading Vibrissae's NYT link back in 2008 and getting furious at the absurdly generous US government (read: Geitner & his pals) response to the banks' criminal destruction of value. The Swedish example is worth a look, if you didn't know about it.
posted by mediareport at 5:33 AM on September 2, 2011

You realize what the US ended up doing wasn't that far off what Sweden did - forced the banks take equity from the government, buy troubled assets from the banks, sell them off at hopefully a higher price than what you bought them for.

Granted it wasn't as smooth and it was well conceived, and there was a lot more leakage mostly due to political reasons, and the exit values from the TARP equity were way too low, but the end result wasn't that different.
posted by JPD at 5:41 AM on September 2, 2011

I have the horrible feeling that, at the end of all this, the United States will be a lifeless wasteland where the only movement is 4 lawyers chasing each other around a pole.
posted by GenjiandProust at 5:44 AM on September 2, 2011 [1 favorite]

And yet credit unions still have only 12% of the market. People. Don't. Care.
posted by headnsouth at 5:57 AM on September 2, 2011 [1 favorite]

I'm mad about the fact that someone like me who did not buy a house because I knew I didn't have enough cash to put down is even further behind because of the bubble. who can seriously save up $60,000 as a down-payment?

House prices need to come down more than $100,000 to fix what is wrong, but that will never happen since it would basically mean every other point of the economy would need to move with it.

I hope the banks, appraisers, realtors and those in the government that were supposed to be regulating them but instead let this get out of control are happy.
posted by zombieApoc at 6:12 AM on September 2, 2011

zombie, houses will eventually get back into balance with historic averages. If house prices aren't allowed to drop, then everything else will go up. If we try to prevent that too.... well, it's kinda like pressure. You can only dam the water for so long, if it keeps accumulating.
posted by Malor at 6:39 AM on September 2, 2011

In most cases retirement funds are protected even on recourse loans.

In my case they're earmarked by me as retirement, they're really just an investment account (I don't have a 401K at work, govt worker). The money in my IRAs would probably end up being protected, but that would likely be all the money I have left after it was over.

Short of renting a safe deposit box and filling it with platinum strips to "hide" my money from the bank, they'd end up with most of it. My actual long term goal is to get enough cash flow to buy a new house and the current depressed prices, move it, and rent the current house out for roughly the cost of the new mortgage payment. If home prices every went back up to reasonable values (replacement value), between the time it'll take to appreciate and the increased equity on the new home it would get me to about half way back to not being underwater.
posted by SirOmega at 7:26 AM on September 2, 2011

The Lawsuits were filed EOD

FHFA Link to the actual filings
posted by JPD at 2:21 PM on September 2, 2011

Have to laugh - 13 entities being sued - 3 of which are BAC under one name or another.
posted by JPD at 2:23 PM on September 2, 2011 [1 favorite]

zombieApoc: "I'm mad about the fact that someone like me who did not buy a house because I knew I didn't have enough cash to put down is even further behind because of the bubble. who can seriously save up $60,000 as a down-payment?"

Would you really find it more feasible if it were $40k? I probably can in a few years, and pretty quickly once the car loan is paid off. Especially if I borrow against the 403b. But doing the math, it's not all that attractive an investment. I'd barely break above the standard deduction, and as the principal goes down it'd stop being a viable break.

You can always try FHA loans, which asks for 3.5 pecent down. But I kinda like renting in this down market. I don't have to deal with property taxes, city rental code inspections and fees, or having to cut the cable every time the person leasing a room breaks contract.

So I don't feel like I'm falling even further behind. But even if you do, Minneapolis is part of Case-Shiller, it looks like while national seasonally-adjusted prices are back to 2003 levels, MN is back to Jan 2001.
posted by pwnguin at 5:07 PM on September 2, 2011

"... A lot of money, but not within shouting distance of a trillion dollars."
posted by JPD at 7:22 AM on September 2

A year ago, Moody's estimated the remaining bad loan bank charge offs on residential and commercial loans to be about $268 billion. They thought 5 quarters of $50 billion write-offs would get the industry back to book-to-market balance. But since then, home prices nationally have continued to decline, -5.9% year over year, 2010 2nd quarter to 2011 2nd quarter, even with the upturn of the 2011 2nd quarter factored in. Those kind of results put even some recent home buyers, and many more older homeowners, underwater (or underwater, again) on anything but 20% down conventional mortgages generated in late 2010 and spring 2011 (and even those people not underwater have lost money on their home investments). Add in commercial real estate losses in the last year by major banks, and the continuing write downs of MBSs and CDSs instruments that financed the whole real estate bubble by investment banks and securities holders who won't provide additional capital to a banking sector in need, and the problem is nothing like the $50 billion your back-of-the-envelope math suggests.

It may not be the $1 trillion immediate bank asset problem that the worst estimates suggest, but systemically, to the broader capital market, it is probably closer to $1 trillion, than it is to $50 billion.
posted by paulsc at 5:27 PM on September 2, 2011

that's not what you said - you said the problem bank list had a trillion dollars in bad debt. It wasn't "The system has a trillion dollars in bad debt to absorb" never mind the fact that you are quoting an old moody's estimate of 268 billion - which is still only a quarter of a trillion.

Here I'll quote it for you:
"Some estimates insist that something like the worst 300 banks on the above list have something like 1 trillion dollars of bad real estate related assets still on their books "
posted by JPD at 6:13 PM on September 2, 2011

Also quoting Moody's and S&P like they have any clue what so ever? Well thanks for my evening laugh.
posted by JPD at 6:14 PM on September 2, 2011

"Also quoting Moody's and S&P like they have any clue what so ever? Well thanks for my evening laugh."
posted by JPD at 9:14 PM on September 2

Would an article from May of this year in American Banker be more informative?

One of the categories of lending included in the worst estimates of bad bank loans, that's not strictly reported as mortgage debt, is second-lien loans, which at the end of 2010 were another $400 billion or so of real estate related debt. It's not all deliquent, but as second tier debt in a housing market that seems to not be recovering, in an economy that where unemployment seems likely to remain high, American Banker says:

"So should bankers be worried about second liens?

Yes, because we're still talking about a lot of once-collateralized loans that have become unsecured.

From their peak in mid-2006 housing prices declined 31.8% through January 2011 as measured by the 20-city Case-Shiller composite index. And according to Zillow Inc., 15.7 million of single-family homeowners — 27% of homeowners with a mortgage — were underwater at the end of 2010.

That's why some say second-lien loan exposure has the potential to blow a hole in bank balance sheets. (See related story.) Adam Levitin, a law professor at Georgetown University, said banks are carrying their second-lien portfolios at overly optimistic values, which only postpones the pain.

"Second-lien loan exposure seems to be highly concentrated on the four largest banks," he said. "It is kind of a time bomb waiting to go off. They are not being carried at fair market value."

posted by paulsc at 12:57 AM on September 3, 2011

Of course, at this point, the only thing that would make me happy would be heads on pikes up and down Wall Street.

Wait for it ....
posted by krinklyfig at 2:14 AM on September 3, 2011

House prices need to come down more than $100,000 to fix what is wrong, but that will never happen since it would basically mean every other point of the economy would need to move with it.

Wait for it ......
posted by krinklyfig at 2:15 AM on September 3, 2011

Basically, the banks still own a lot of paper which they're not willing to write down. They should have taken the haircut back in 2009, but we let them ride on this overvalued, overrated paper for a long time, mostly so they wouldn't implode due to the collapse in value on their books. But it's time for the banks to take their haircut now. Who else is going to take it? The rest of us already got one.
posted by krinklyfig at 2:18 AM on September 3, 2011