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Big Banks Sued Over Risky Mortgages

SCOTT SIMON, host: A federal regulator has filed a lawsuit against 17 financial firms - some of them the biggest names on Wall Street. The suit alleges misrepresentation and negligence in the sale of mortgage securities. NPR's Chris Arnold reports.

CHRIS ARNOLD: Bank of America, JP Morgan Chase, Goldman Sachs and others are being sued essentially for selling bad mortgages. The Federal Housing Finance Agency is suing on behalf of the government-backed firms Fannie Mae and Freddie Mac, who bought the mortgages. Guy Cecala is the publisher of Inside Mortgage Finance.

GUY CECALA: This lawsuit is an attempt to recoup some of the losses Fannie Mae and Freddie Mac suffered from investing very heavily in subprime loans.

ARNOLD: So this basically investors, in this case Fannie Mae and Freddie Mac, go to the major banks and say, hey, look you, sold us this stuff, you said it was AAA, you said it was great and look, it was garbage and we lost billions of dollars.

CECALA: Exactly.

ARNOLD: Investors have filed many similar lawsuits before, but Fannie and Freddie bought a ton of bad loans, so Cecala says the liability could potentially be huge.

CECALA: It's probably somewhere in the neighborhood of thirty to fifty billion dollars. That is enough to break a number of these financial institutions in there.

ARNOLD: But, Cecala says the lawsuit could be a tough one to prove. Fannie and Freddie were certainly experienced investors, who the banks could argue should have known exactly what they were buying, and that the companies decided to take the risk of buying up all these subprime loans.

CECALA: Fannie Mae and Freddie Mac, again, very sophisticated investors in many cases were able to underwrite and look at each loan going into the securities they were buying, so it's hard to make that case that they were duped.

ARNOLD: Cecala says it's hard to estimate how substantial any settlement might be. Chris Arnold, NPR News.

SIMON: You're listening to NPR News. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.