FHFA Sues 17 firms (banks) to recover losses to Fannie Mae and Freddie Mac

FEDERAL HOUSING FINANCE AGENCY
NEWS RELEASE

For Immediate Release Contact: Corinne Russell (202) 414-6921
September 2, 2011 Stefanie Johnson (202) 414-6376

FHFA Sues 17 Firms to Recover Losses to
Fannie Mae and Freddie Mac

Washington, DC -- The Federal Housing Finance Agency (FHFA), as conservator for Fannie
Mae and Freddie Mac (the Enterprises), today filed lawsuits against 17 financial institutions,
certain of their officers and various unaffiliated lead underwriters.  The suits allege violations of
federal securities laws and common law in the sale of residential private-label mortgage-backed
securities (PLS) to the Enterprises.
Complaints have been filed against the following lead defendants, in alphabetical order:
1. Ally Financial Inc. f/k/a GMAC, LLC
2. Bank of America Corporation
3. Barclays Bank PLC
4. Citigroup, Inc.
5. Countrywide Financial Corporation
6. Credit Suisse Holdings (USA), Inc.
7. Deutsche Bank AG
8. First Horizon National Corporation
9. General Electric Company
10. Goldman Sachs & Co.
11. HSBC North America Holdings, Inc.
12. JPMorgan Chase & Co.
13. Merrill Lynch & Co. / First Franklin Financial Corp.
14. Morgan Stanley
15. Nomura Holding America Inc.
16. The Royal Bank of Scotland Group PLC
17. Société Générale

These complaints were filed in federal or state court in New York or the federal court in
Connecticut.  The complaints seek damages and civil penalties under the Securities Act of 1933,
similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011.  In
addition, each complaint seeks compensatory damages for negligent misrepresentation.
Certain complaints also allege state securities law violations or common law fraud.



As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and
conserving these companies’ assets and does so on behalf of taxpayers. The complaints filed
today reflect FHFA’s conclusion that some portion of the losses that Fannie Mae and Freddie
Mac incurred on private-label mortgage-backed securities (PLS) are attributable to
misrepresentations and other improper actions by the firms and individuals named in these
filings. Based on our review, FHFA alleges that the loans had different and more risky
characteristics than the descriptions contained in the marketing and sales materials provided to
the Enterprises for those securities.

FHFA filed the complaints under the broad authority granted to it by the Housing and
Economic Recovery Act of 2008.  The U.S. legal system provides for addressing such alleged
misrepresentations through the nation’s securities laws and traditional common law.  FHFA is
following those legal remedies in filing these complaints and seeks to recover on losses to the
Enterprises that are the legal responsibilities of others.

Discussions regarding these matters have taken place with several of the firms receiving
complaints and, where constructive, they will continue.

Link to FHFA filings in PLS cases
###
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets and financial institutions.

Operation #Green Right Press Release

CITIZENS GATHER IN MONTANA TO PROTEST TAR SANDS OIL AND SHIPPING OF EQUIPMENT TO CANADIAN REFINERIES, ANONYMOUS JOINS IN!

To all free-thinking citizens of the world:
Anonymous' Operation Green Rights calls your attention to an urgent situation in North America perpetuated by the boundless greed of the usual suspects: Exxon Mobil, ConocoPhillips, Canadian Oil Sands Ltd., Imperial Oil, the Royal Bank of Scotland, and many others.

This week, activists are gathering along U.S. Highway 12 in Montana to protest the transforming a serene wilderness into an industrial shipping route, bringing "megaloads" of refinery equipment to the Alberta Tar Sands in Canada (see Tar Sands FAQ Sheet below).

Anonymous now joins the struggle against "Big Oil" in the heartland of the US. We stand in solidarity with any citizen willing to protest corporate abuse. Anonymous will not stand by idly and let these environmental atrocities continue. This is not the clean energy of the future that we are being promised.

We will, over the course of the next few days, use the powers we posses to spread news about this scenario and the corporations involved. We are actively seeking leaks to expose the corruption that we all KNOW is beneath this.
Anonymous' Operation Green Rights will support the activists on July 13-14 when they initiate civil disobedience and direct action to confront this dire issue. We urge you to get involved. Montana and Idaho citizens, we ask you to join local protests and attend the Highway 12 rally if you are close enough! If you're not, join us in the IRC listed below for the fun!

The continued development of the tar sands is a major step backward in the effort to curb global warming. Anonymous will not suffer this without a fight, and Operation Green Rights will always support the rights of the people to live in an unpolluted world, and aim to help safeguard it for the future.

We are Anonymous.
We are Legion.
We do not forgive.
We do not forget.
Expect us.

IRC: irc.anonops.li channel #operationgreenrights
Location of Protest: http://tinyurl.com/5sy57bg
Sign up to protest! http://www.tarsandsaction.org/sign-up/
Tar Sands FAQ sheet: http://pastebin.com/b7jG1Y2n

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Cheat Sheet on Bank Investigations and the Probes That Have Petered Out

by Marian Wang
ProPublica, May 24, 2011

As we and many others have noted, no top banking executives have been successfully prosecuted in connection with the financial crisis: not for making the bad loans that fed the mortgage machine, not for lying about the quality of the mortgages, and not for foreclosing improperly when homeowners struggled to make loan payments.

But there have been many investigations. Some are still pending, others seem to have fallen by the wayside. Here’s our overview of what the banks have been accused of doing at each stage of the mortgage machine.

Let us know in the comments section if we’ve left off any significant investigations that have died quiet deaths or are still ongoing.

The First Step in the Machine: Risky Lending and Underwriting

Regulatory action against the major lenders has been relatively rare. In one of the few cases, the FDIC filed a civil suit in March against three former executives at Washington Mutual for risky lending. The executives at the failed bank were accused of taking “extreme and historically unprecedented risks” in their lending practices in order to maximize their compensation. The executives have denied the charges. Federal authorities have been investigating the bank since it failed and was sold to JPMorgan Chase in 2008.

Earlier this year, the Justice Department ended its criminal investigation of Angelo Mozilo, the former CEO of Countrywide Financial, a major subprime lender. It did not bring charges. Mozilo had settled civil charges with the SEC for $67.5 million—though that was for insider trading, not bad lending.

And when the Justice Department did get a conviction of a mortgage company CEO in April, the executive, Lee Farkas of Taylor, Bean & Whitaker, was found guilty of bank fraud, wire fraud, securities fraud and conspiracy—offenses not specific to the company’s mortgage operations. It was nonetheless touted as “the most significant criminal prosecution to date rising out of the financial crisis.”

For the most part, banks struggling with allegations of bad lending have faced demands from investors to buy back troubled mortgages. The banks have at times resisted, attributing the losses to broader economic turmoil.

The relative lack of regulatory action was highlighted in a New York Times article by Gretchen Morgenson and Josh Rosner, which detailed the case of NovaStar Financial, a subprime lender that the SEC never took any action against. That’s despite a damning report from HUD, lawsuits from homeowners, cease-and-desist orders from state regulators and repeated tips from short-sellers. (The SEC declined to comment on its investigation.)

The government has recently shown signs of taking action when it comes to recouping its own losses. The Justice Department sued Deutsche Bank in early May, alleging that a unit within the German bank “recklessly” endorsed bad mortgage loans in order to get government guarantees that would 1) make the loans easier for the bank to resell to investors, and 2) put the government on the hook for losses.

The lawsuit alleges that Deutsche hid evidence that the loans were bad, costing the government millions in insurance payouts while the bank made profits off the resale. Deutsche told the Wall Street Journal that most of the allegations were about activity that occurred before the unit became a subsidiary of the bank.   

Though the suit against the mortgage lender was believed to be the first of its kind, prosecutors have said that it probably wouldn’t be the last. Here’s the Journal:

It wouldn't be a "fantastical stretch to think we are looking at other financial institutions as well," Mr. Bharara said at a news conference, declining to be more specific.

Next Step: Scandals of Securitization

The Journal reported this week that state attorneys general in New York and California are stepping up investigations of a whole range of bank activities—from the origination of mortgage loans to the packaging of mortgage securities.

New York’s attorney general Eric Schneiderman also recently announced investigations into the packaging and selling of mortgage-backed securities by a number of big banks. Morgan Stanley, Goldman Sachs, Bank of America, Royal Bank of Scotland, UBS, JPMorgan and Deutsche Bank are said to be the subjects. Of course, there’s no guarantee that anything will come of these. Schneiderman’s predecessor—now New York Gov. Andrew Cuomo—also had been investigating whether several banks had lied to rating agencies about the quality of their mortgage securities, and no charges resulted from that investigation.

The Justice Department also declined to bring criminal charges against executives at AIG, the insurer that sold financial instruments that allowed major financial firms to place bets against the housing market—and sometimes, against the same financial products they sold to investors. As of last year, the SEC reportedly was still investigating.

Bear

In 2009, prosecutors lost the first major criminal case of the financial crisis when the jury acquitted two Bear Sterns hedge fund managers accused of securities fraud and lying to investors about their failing investments.

And Then Came Those Fancy, Complex Securities Called CDOs

We’ve documented a number of investigations into the big banks’ dealings of mortgage-backed securities known as collateralized debt obligations. The Securities and Exchange Commission of course settled a civil suit against Goldman Sachs last year for $550 million, though its related suit against Goldman trader Fabrice Tourre is ongoing.

As we noted earlier this month, Goldman Sachs disclosed in a regulatory filing that it had received subpoenas from regulators regarding the same deal as well as other CDO deals. And it’s not just regulators: The Journal reported on Friday that Goldman executives expect to receive subpoenas soon from U.S. prosecutors seeking more information.

We also reported late last year that the SEC has an investigation into a JPMorgan Chase deal called “Squared.” The agency formally warned two execs involved in the deal that it may take action against them, as Bloomberg reported in April. JPMorgan disclosed in a recent filing that it is in “advanced negotiations” with regulators but didn’t specify which deals were being scrutinized.

UBS, Deutsche, and Citigroup also were last year reported to have received civil subpoenas from the SEC as part of an investigation into CDO dealings. (See our cheat sheet from around that time.) The Journal also reported that Morgan Stanley and Goldman Sachs were under early-stage criminal scrutiny by the Justice Department.

Finding the Flaws in the Foreclosure Process

Charges against the banks could be coming for their foreclosure-related problems. Huffington Post reported last week that government audits of Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial accused the banks of engaging in fraud with government-guaranteed mortgages. There are few details about what are in the audits, but here’s how HuffPo explains the allegations:

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

The Department of Housing and Urban Development’s inspector general conducted the audits and has referred the findings to the Justice Department, which will have to decide whether to bring charges. (Bank of America and Wells Fargo declined to comment to Reuters at the time—the others weren’t available for comment.)

Both federal regulators and 50 state attorneys general also have been conducting investigations since news of “robo-signers” and flawed foreclosure practices by the nation’s biggest banks exploded into a full-blown scandal last fall.

There have been numerous reports  of divisions within the two coalitions of investigators. Among the federal agencies, the historically bank-friendly Office of the Comptroller of the Currency had pushed for more modest fines compared with the proposals favored by other federal agencies.

As we’re reported, federal regulators have issued “consent orders” that require banks to perform reviews of their own foreclosure actions and compensate borrowers for financial injuries. From our earlier reporting:

The reviews are expected to culminate late this year or early next year, when checks are scheduled to go out to victims. Regulatory sources told us that the total amount sent to eligible homeowners would likely be disclosed. Even before this phase, observers may get a hint of what's happening if, as expected, regulators levy financial penalties against the banks. The findings of the reviews will determine the size of those penalties, regulatory officials said.

The state attorneys general are also, along with Justice Department negotiators, trying to reach a settlement with the banks. There’s also dissent among their ranks: At least eight Republican attorneys general have voiced disagreement with any proposal that would require banks to cut borrowers’ mortgage debt. Virginia’s attorney general compared the debt writedowns to welfare.

Banks, meanwhile, have reportedly proposed paying $5 billion to settle the states’ foreclosure investigation. That’s a quarter of the $20 billion penalty that had been previously proposed.

More Flaws in the Fallout After Foreclosure

Other investigations and lawsuits against the banks have focused less on their dealings with homeowners and more on the fallout after foreclosure. For instance, the City of Los Angeles earlier this month filed a civil complaint against Deutsche Bank, alleging that the bank illegally evicted tenants and let foreclosed homes fall into disrepair and cause neighborhood blight. Deutsche, in this case, was the trustee for the investors who technically owned the loans. The city said that made Deutsche “contractually responsible” for maintenance and actions against tenants—but the bank said the city “filed this lawsuit against the wrong party.”

The L.A. Times notes that Deutsche and other banks have faced similar suits before and gotten off the hook:

In 2008, the city of Cleveland sued Deutsche Bank and other financial institutions alleging that subprime mortgage lending practices had resulted in widespread foreclosures and blight. A judge dismissed the suit.

Follow on Twitter: @mariancw

Cheat Sheet on Bank Investigations and the Probes That Have Petered Out

by Marian Wang
ProPublica, May 24, 2011

As we and many others have noted, no top banking executives have been successfully prosecuted in connection with the financial crisis: not for making the bad loans that fed the mortgage machine, not for lying about the quality of the mortgages, and not for foreclosing improperly when homeowners struggled to make loan payments.

But there have been many investigations. Some are still pending, others seem to have fallen by the wayside. Here’s our overview of what the banks have been accused of doing at each stage of the mortgage machine.

Let us know in the comments section if we’ve left off any significant investigations that have died quiet deaths or are still ongoing.

The First Step in the Machine: Risky Lending and Underwriting

Regulatory action against the major lenders has been relatively rare. In one of the few cases, the FDIC filed a civil suit in March against three former executives at Washington Mutual for risky lending. The executives at the failed bank were accused of taking “extreme and historically unprecedented risks” in their lending practices in order to maximize their compensation. The executives have denied the charges. Federal authorities have been investigating the bank since it failed and was sold to JPMorgan Chase in 2008.

Earlier this year, the Justice Department ended its criminal investigation of Angelo Mozilo, the former CEO of Countrywide Financial, a major subprime lender. It did not bring charges. Mozilo had settled civil charges with the SEC for $67.5 million—though that was for insider trading, not bad lending.

And when the Justice Department did get a conviction of a mortgage company CEO in April, the executive, Lee Farkas of Taylor, Bean & Whitaker, was found guilty of bank fraud, wire fraud, securities fraud and conspiracy—offenses not specific to the company’s mortgage operations. It was nonetheless touted as “the most significant criminal prosecution to date rising out of the financial crisis.”

For the most part, banks struggling with allegations of bad lending have faced demands from investors to buy back troubled mortgages. The banks have at times resisted, attributing the losses to broader economic turmoil.

The relative lack of regulatory action was highlighted in a New York Times article by Gretchen Morgenson and Josh Rosner, which detailed the case of NovaStar Financial, a subprime lender that the SEC never took any action against. That’s despite a damning report from HUD, lawsuits from homeowners, cease-and-desist orders from state regulators and repeated tips from short-sellers. (The SEC declined to comment on its investigation.)

The government has recently shown signs of taking action when it comes to recouping its own losses. The Justice Department sued Deutsche Bank in early May, alleging that a unit within the German bank “recklessly” endorsed bad mortgage loans in order to get government guarantees that would 1) make the loans easier for the bank to resell to investors, and 2) put the government on the hook for losses.

The lawsuit alleges that Deutsche hid evidence that the loans were bad, costing the government millions in insurance payouts while the bank made profits off the resale. Deutsche told the Wall Street Journal that most of the allegations were about activity that occurred before the unit became a subsidiary of the bank.   

Though the suit against the mortgage lender was believed to be the first of its kind, prosecutors have said that it probably wouldn’t be the last. Here’s the Journal:

It wouldn't be a "fantastical stretch to think we are looking at other financial institutions as well," Mr. Bharara said at a news conference, declining to be more specific.

Next Step: Scandals of Securitization

The Journal reported this week that state attorneys general in New York and California are stepping up investigations of a whole range of bank activities—from the origination of mortgage loans to the packaging of mortgage securities.

New York’s attorney general Eric Schneiderman also recently announced investigations into the packaging and selling of mortgage-backed securities by a number of big banks. Morgan Stanley, Goldman Sachs, Bank of America, Royal Bank of Scotland, UBS, JPMorgan and Deutsche Bank are said to be the subjects. Of course, there’s no guarantee that anything will come of these. Schneiderman’s predecessor—now New York Gov. Andrew Cuomo—also had been investigating whether several banks had lied to rating agencies about the quality of their mortgage securities, and no charges resulted from that investigation.

The Justice Department also declined to bring criminal charges against executives at AIG, the insurer that sold financial instruments that allowed major financial firms to place bets against the housing market—and sometimes, against the same financial products they sold to investors. As of last year, the SEC reportedly was still investigating.

Bear

In 2009, prosecutors lost the first major criminal case of the financial crisis when the jury acquitted two Bear Sterns hedge fund managers accused of securities fraud and lying to investors about their failing investments.

And Then Came Those Fancy, Complex Securities Called CDOs

We’ve documented a number of investigations into the big banks’ dealings of mortgage-backed securities known as collateralized debt obligations. The Securities and Exchange Commission of course settled a civil suit against Goldman Sachs last year for $550 million, though its related suit against Goldman trader Fabrice Tourre is ongoing.

As we noted earlier this month, Goldman Sachs disclosed in a regulatory filing that it had received subpoenas from regulators regarding the same deal as well as other CDO deals. And it’s not just regulators: The Journal reported on Friday that Goldman executives expect to receive subpoenas soon from U.S. prosecutors seeking more information.

We also reported late last year that the SEC has an investigation into a JPMorgan Chase deal called “Squared.” The agency formally warned two execs involved in the deal that it may take action against them, as Bloomberg reported in April. JPMorgan disclosed in a recent filing that it is in “advanced negotiations” with regulators but didn’t specify which deals were being scrutinized.

UBS, Deutsche, and Citigroup also were last year reported to have received civil subpoenas from the SEC as part of an investigation into CDO dealings. (See our cheat sheet from around that time.) The Journal also reported that Morgan Stanley and Goldman Sachs were under early-stage criminal scrutiny by the Justice Department.

Finding the Flaws in the Foreclosure Process

Charges against the banks could be coming for their foreclosure-related problems. Huffington Post reported last week that government audits of Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial accused the banks of engaging in fraud with government-guaranteed mortgages. There are few details about what are in the audits, but here’s how HuffPo explains the allegations:

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

The Department of Housing and Urban Development’s inspector general conducted the audits and has referred the findings to the Justice Department, which will have to decide whether to bring charges. (Bank of America and Wells Fargo declined to comment to Reuters at the time—the others weren’t available for comment.)

Both federal regulators and 50 state attorneys general also have been conducting investigations since news of “robo-signers” and flawed foreclosure practices by the nation’s biggest banks exploded into a full-blown scandal last fall.

There have been numerous reports  of divisions within the two coalitions of investigators. Among the federal agencies, the historically bank-friendly Office of the Comptroller of the Currency had pushed for more modest fines compared with the proposals favored by other federal agencies.

As we’re reported, federal regulators have issued “consent orders” that require banks to perform reviews of their own foreclosure actions and compensate borrowers for financial injuries. From our earlier reporting:

The reviews are expected to culminate late this year or early next year, when checks are scheduled to go out to victims. Regulatory sources told us that the total amount sent to eligible homeowners would likely be disclosed. Even before this phase, observers may get a hint of what's happening if, as expected, regulators levy financial penalties against the banks. The findings of the reviews will determine the size of those penalties, regulatory officials said.

The state attorneys general are also, along with Justice Department negotiators, trying to reach a settlement with the banks. There’s also dissent among their ranks: At least eight Republican attorneys general have voiced disagreement with any proposal that would require banks to cut borrowers’ mortgage debt. Virginia’s attorney general compared the debt writedowns to welfare.

Banks, meanwhile, have reportedly proposed paying $5 billion to settle the states’ foreclosure investigation. That’s a quarter of the $20 billion penalty that had been previously proposed.

More Flaws in the Fallout After Foreclosure

Other investigations and lawsuits against the banks have focused less on their dealings with homeowners and more on the fallout after foreclosure. For instance, the City of Los Angeles earlier this month filed a civil complaint against Deutsche Bank, alleging that the bank illegally evicted tenants and let foreclosed homes fall into disrepair and cause neighborhood blight. Deutsche, in this case, was the trustee for the investors who technically owned the loans. The city said that made Deutsche “contractually responsible” for maintenance and actions against tenants—but the bank said the city “filed this lawsuit against the wrong party.”

The L.A. Times notes that Deutsche and other banks have faced similar suits before and gotten off the hook:

In 2008, the city of Cleveland sued Deutsche Bank and other financial institutions alleging that subprime mortgage lending practices had resulted in widespread foreclosures and blight. A judge dismissed the suit.

Follow on Twitter: @mariancw