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Comment by crag | Hacker News Reader

These lawsuits are to recoup some of the loses incurred by issuing FHA loans (Frannie and Freddie). Both agencies were mislead by the various banks. Who did everything they could to issue "FHA"loans. Both agencies relied (and they still do) on the banks writing the loan to verify credit worthiness. Which of course, the banks didn't. They were making too much money.

It was a win win for the bank. Cause when the bottom fell out of the housing market Freddie and Frannie were left holding the bag - in other words, the taxpayers. Add that on top of that, TARP, and the banks walked away making trillions.

It was the biggest heist in history. And perfectly legal, in the US.

The case will probably be settled. Banks will pay like 20 billion (or so) and we're all forget it in a week.

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I wanna add something.. there is one saving grace in all this mess; investors, AIG, countries, other banks; are all suing each other.

BofA is facing 4 major lawsuits which could cost it billons (total I think is 80 billion). That alone might bring down the bank. But the more likely senario is that our government will once again step in to bail BofA out.

Now that would cause a HUGE fight in Washington. But you know, the biggest statement you can make is to pull your money out of bofA (and the others). Find a credit union or a local bank. You are insured up to $250,000 per account in any US bank. So you don't have to do business with the big players. They don't care about you anyway. They just want your deposits.

But everyone suing everyone else doesn't help anyone apart from the lawyers. And the fights in Washington are utterly unproductive.

In order for job creation to take place, the USA needs less volatility rather than more : If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...

It doesn't matter. Warren Buffett said it best, there's a class war going on and only the people at the top (government, banks, multinational corporations) are winning. They spread propaganda about unions being bad for you, or they create ridiculously stupid laws (such as the software patent system!). If the peasants won't revolt, the best we can hope for is infighting amongst those with the most wealth and power.

The problem is capital being concentrated; we need a more horizontal society otherwise we're all waiting for the trickle-down effect and that simply doesn't happen. Companies are firing more than they are hiring and it's been like that for the last few years.

If a business owner has no clear vision of what the future holds, then the prudent thing to do is not to invest...

No, the prudent thing is to invest and to profit as much as possible by firing employees, forcing the remaining employees to be more productive, and screwing them over on wages and benefits. Then get the hell out before it falls apart.

Suing won't always help but the best thing which could happen for US capitalism is for some of the large banks to fail and be broken up, with lawsuits against their former managers. If there is to be suing, hope it goes large enough to act as a deterrent against fraud and gross incompetence - the government certainly isn't stepping into this role…

Exactly. "But I'm too big to fail!" Well, then let's make you smaller.

It's even worse here in the UK - the government now pretty much owns the huge RBS Group and the much smaller Northern Rock and has a large stake in Lloyds.

So not much point the government suing something they (i.e. we the taxpayer) own!

Well, that's a rather different situation.

The cause of the underlying collapse in the securitised mortgage market was borrowers being over-rated on credit worthiness and the securities derived from these mortgages then also subsequently being overrated. Market starts tightening, the underlying value of the overvalued securities starts becoming apparent and you've got a burst bubble and a general market liquidity problem, hence TARP and QE. All of which was sadly predictable - when the nominal lending institution is given a financial incentive to write loans without the balancing disincentive of default to ensure they only write repayable loans, or the equally strong financial incentive to overvalue their securities, why wouldn't they?

The US approach to this (all set up by Bush, lest we forget) is what's leading to this round of very reasonable lawsuits about financial fraud. The UK approach you've highlighted was rather different though. Northern Rock was completely sunk through illiquidity and is now wholly owned by the state. RBS was little better (thanks largely to a poor purchase of ABN AMRO) and is heavy majority state owned, Lloyds tried to buy the similarly sunken HBOS at a fire-sale price without doing proper due diligence, got into trouble and is now state owned to a lesser degree.

Let's not forget; the names are nothing more than proxies for their collective owners who reaped their profits. There is merit to sueing those who profited from the Fannie Mae / Freddie Mac debacle because the entities still meaningfully exist with continuity of ownership. This isn't true with any of the UK institutions; they made their poor decisions, their companies started foundering and to protect both depositors and the wider economy, the government stepped in, heavily diluted (wiped out with Northern Rock) the share capital of the owners who could no longer support the businesses and put new management in place. They aren't being sued in the way you propose because the responsible parties have already been penalised.

"The responsible parties have already been penalised"

The responsible parties being the shareholders rather than the executives? I know that is correct, and I know some people who lost a lot of money in RBS, but it does seem wrong to me that the executives that led these companies to epic disasters simply walk away keeping the bonuses they accumulated along the way.

However, I'm not naive enough to think that any of this will change any time soon.

Yes, but that's a separate issue of shareholder governance. At present there isn't a legal power of criminal incompetence in charge of a financial institution to go after Adam Crozier, Fred Goodwin or Victor Blank for setting up businesses no safer for Britain than any number of industrial health and safety violations and personally riding the profits before the inevitable blow-up.

Given the British economy is so reliant on financial services this should perhaps be revised; we regulated factories in the past in spite of protestations of its expense and difficulty because we recognised it was in the best interests of society, and we should now be doing the same to finance. Too big to fail is privatising the profits while socialising the losses; it is too big to be private without enormous and mandated operator's liability insurance, funded by the owners.

Do you think there is any way of developing an objective "too big to fail" test that could be applied to these companies and actually give a realistic answer?

[Edit: I just noticed that the former auditor of RBS is now the Chairman of Deloittes!]

There's certainly a lot of the Old Boys Club about auditing and regulation, anecdotally...

Too big to fail? The boundary cases will always be the challenge but I suspect we could get started by mandating a limit to percentages of GDP under management, overall, sectorally and regionally.

Fundamentally though, the issue is one of liability and should be insured no matter what the size of the business against the cleanup costs. I suspect that would regulate out of existence whole sectors as simply too expensive to insure, but is that really worse than a systemic liability to the taxpayer of several multiples of GDP, as at present?

Completely agree. But tell that to your elected officials.

"Verify credit worthiness" : This is part of the problem. The documentation likely only specifies that the banks had to obtain a recent FICO score. Not do 'real due diligence' on the actual credit worthiness of the borrowers.

And while FICO scores may have been relevant data for historical default analyses, as soon as evening courses in 'Fix your credit score' appeared, the historical data became a completely worthless foundation upon which to base any analysis.

So from a legal standpoint, the banks probably have a decent case to claim that they did what they were contractually obliged to do. From a realistic standpoint, though, they see that it's in the hands of politicians now, and they'll settle rather than become/remain a political football in 2012.

I would agree with that. Expect the bank also lowered the required FICO score.

15 yeas ago you needed at least 610 score with a 15 to 25% deposit to buy a house. In 2006 you need a FICO score of 520 ad no deposit. You didn't even need job.

The banks didn't do their job. They were making fortunes on fees and reselling the loans.

BUT the government didn't do it's job either. The banks didn't exactly hide the fact they were doing this. I mean, every real estate agent knew it. I'm sure the various government agencies did too. But no one cared cause everyone was making money.

Until the house came down. :)

I remember reading, it was probably in "The Big Short", that FICO scores are actually a pretty awful measure of whether someone is a good risk for a mortgage.

FICO, tell me about RICO.

Trillions? Even if you were referring to the amount of money made by all American investment banks in the last several years, you'd still be off by a few orders of magnitude.

Oh really? In 2009 The Fed had brought 1.25 trillion in mortgages. And that was just in 2009.

Research the Federal Open Market Committee or GSE's.

The banks made it coming and going. And still are. I also wanna point out banking isn't the only sector enjoying these golden times. The drug war, terror war, general war, oil, food - all enjoy generous subsides/funding from our government.

If you buy 100 dollars of mortgage bonds at a price of p and I buy it from you at a price of q, then your profit in that transaction is 100*(q-p), not 100. Besides, if you look at the profits made by investment banks since 2008 you'll see that they're nowhere close to trillions. Even the most profitable investment bank in the world, Goldman Sachs, had a total net income in the last three years of less than 25 billion. But your implication was that they made trillions as a result of what happened in the financial crisis, which is an even stronger claim.

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