Bank of America’s (BoA)
Major banks are slated to lose billions because of lawsuits filed against them on charges of selling undervalued mortgage-backed securities (MBS) through shady marketing tactics. A federal court of the U.S has already pronounced a judgment saying those banks which have been convicted of fraud are liable to pay as much as $250 billion in order to cover up losses incurred by all the mortgage bond buyers.
This lawsuit was entertained by the New York Southern District Court. The bench was presided over by Judge Jed. S. Rakoff who conferred the final judgment on 5th February 2013. The judgment is expected to hit large banks hard and in this entire melee only one comparatively weaker lender, i.e., Flagstar Bank based at Michigan, will share the losses with its bigger peers. As per the observation made by Rakoff, Flagstar was unable to prove its innocence in relation to the crime.
There was no way it could justify the threat those mortgages were vulnerable to at the time of selling them to the buyers or investors. As a result, Judge Rakoff was compelled to approve a compensation of about $90 million that will be delivered to the victim, Assured Gauranty Municipal Corporation.
However, financial as well as legal experts are of the view that this kind of judgment may become a destructive example to contend with in the days to come. There are many lawsuits that are being fought across the country which have been filed by the investors on grounds deceitful assurances from the lenders. These issues are as old as the U.S. housing boom during which these aggrieved investors bought the MBS.
In the view of Isaac Gradman, securities litigator associated with the Perry, Johnson, Anderson, Miller & Moskowitz, a law firm based at Santa Rosa, California, this judgment from Judge Rakoff will have far reaching effect and will result in gigantic losses for the banks. Though Gradman is not directly involved in the lawsuits, yet as per his estimates the compensation amount to be delivered by the banks may run up to $200-250 billions in value.
These large financial institutions are seemed to be unperturbed with the lawsuits or even the judgment. There was no official comment from them on the issue but some of the senior executives from those institutions have reportedly issued statements that downplay any major threat to their company’s bottom line.
Take for instance of Bank of America’s (BoA) meeting with its own stock analysts, during which its chief executive officer, Mr. Brian Moynihan has said that the company is in comfortable position as far the mortgage fraud lawsuits filed against them are concerned. In case of BoA, the financial giant is facing the ire of the federal government since the latter has also brought lawsuit against it, in order to recoup the losses it suffered because of mortgage bond fraud worth $24.9 billions committed by the bank. In addition, BoA is also fighting a lawsuit filed against it by MBIA. This private bond insurer’s lawsuit may cost the bank to the tune of $2-3 billions worth as compensation amount.
Recently, BoA has already had to pay around $14 billions worth as settlements with respect to similar such lawsuits it has been bombarded with. Moreover, it has earmarked another $19 billion in order to cover up costs of further compensations it might have to pay later on. All these figures have been mentioned by the bank in its quarterly report.
The fact remains that most of the lenders haven’t prepared themselves for such lawsuits and so, they did not set aside any amount to be used as compensation for the victimized investors.