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Government Lawsuits Against Big Banks Are a Go

Federal regulators filed lawsuits against 17 financial institutions Friday afternoon for allegedly misrepresenting the poor quality of mortgage securities they sold to Fannie Mae and Freddie Mac at the height of the housing bubble.

But while the Federal Housing Finance Agency filed the complaints at the close of business Friday, forewarning of the impending lawsuits had investors unloading shares of Bank of America, JPMorgan Chase and Goldman Sachs.

The suits stem from information drawn from 64 subpoenas that were issued a year ago. In addition to the companies, the complaints also name individuals at the firms who the government believes were responsible for pushing to turn subprime mortgages into securities with inflated credit ratings. –BF

The New York Times:

Within minutes of the filing of the suits, several banks responded with a preview of the legal arguments they will make in the coming months, namely that Fannie and Freddie were sophisticated investors who should have known the securities were not without risk, and that the losses were caused not by fraud or misrepresentation but by underlying difficulties in the housing market.

In a statement, Bank of America said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.” In spite of that warning, Bank of America said, the government-controlled mortgage giants “are now seeking to hold other market participants responsible for their losses.”

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