- New York state appeals court affirmed denying dismissal of claims against Morgan Stanley for fraud. Plaintiff bought $17 million in high-risk notes tied to residential mortgage-backed securities in a $500 million collateralized debt obligation that eventually were wiped out.
- Quicken Loans’ suit was dismissed against the U.S. government for its use of the False Claims Act for failure to state a claim. This suit was brought to prevent a costly enforcement action.
- JP Morgan has settled to pay $48 million fine for shoddy mortgage servicing practices in response to allegations from the Office of the Comptroller of the Currency (OCC). (Consent Order; Termination).
- Credit Suisse AG has settled for $110 million in class action alleging the use of misleading financial disclosure documents that caused the plaintiffs to purchase $1.6 billion in bad mortgage-backed securities.
- Following SCOTUS’s March Omnicare decision, a pension fund is claiming that the Second Circuit failed to take into account said decision in failing to revive Bank of America mortgage suit. The plaintiff requests SCOTUS’s review.
- U.S. District Court judge dismisses whistleblower suit against CitiMortgage where ex-VP claimed the bank engaged in reckless lending practice and made false claims.
- NY appellate court will not revive suit against Morgan Stanley and UBS for misrepresentation of $665 million in residential mortgage-backed securities.
Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.
SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.
In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)
Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times? I don’t think I have my own answer to that question yet, but it is certainly worth considering.
On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.
On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression. It also wreaked havoc on so many individuals, directly and indirectly.
I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.
Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed. We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.
- NY Federal Court ended the suit against US Bank and Bank of America brought by Blackrock and NCUA for failure to properly oversee residential mortgage-backed security trusts finding that most of the trusts fell under state law.
- Deutsche Bank, Morgan Stanley and UBS Securities have settled with Federal Home Loan Bank of Boston for misleading it to purchase $5.9 billion in bad mortgage-backed securities.
- Associated Bank agrees to $200 million, record-breaking settlement with US Department of Housing and Urban Development in discriminatory lending suit.
Judge Caproni (SDNY) issued an Opinion and Order in Adkins v. Morgan Stanley, No. 12-CV-7667 (May 14, 2015). It opens,
This is one of many cases arising out of the collapse of the housing market. This one comes with a twist: homeowners in Detroit who received subprime loans seek to hold a single investment bank responsible under the Fair Housing Act (“FHA”) for discriminating against African-American borrowers, based on their claim that African-Americans were more likely than similarly-situated white borrowers to receive so-called “Combined-Risk loans.” Plaintiffs allege that Morgan Stanley so infected the market for residential mortgages — and for mortgages written by New Century Mortgage Company, a now defunct loan originator, in particular — that it bears responsibility for the disparate impact of New Century’s lending practices. Although Plaintiffs advance creative theories, their class action lawsuit founders on the requirements of Federal Rule of Civil Procedure 23. (1-2, footnote omitted)
Judge Caproni notes that she is “not unsympathetic to Plaintiff’s claims,” she concludes that this class action lawsuit is an inappropriate vehicle to rectify the wrong that Plaintiffs allege Morgan Stanley perpetrated.” (2) I am not an expert on the law of class actions, but the opinion does seem to identify a number of ways in which the proposed class is “unworkable.” (2)
We are now nearly ten years in from the start of the financial crisis and it seems like we can get a broad sense of whether justice has been served. My instinct is that many people would say “No,” a resounding “No!”
At first glance that might seem odd, particularly to the shareholders and management of financial institutions who have paid tens of billions of dollars in fines and judgments. But there is a strong sense that those who have been harmed have not been able to get their day in court with those who did the harming. A case like this reveals the limitations of litigation as a means for seeking justice. Not every injustice is capable of being remedied in a court of law.
What does this tell us about preparing for the aftermath of the next crisis? How can laws be changed now to ensure that the right people and institutions are held accountable when it hits? While there are no easy answers to these questions, lawmakers should consider whether the scope of organizational liability is properly defined, whether agents of organizations are properly held accountable and whether organizations working in tandem with each other can be properly held accountable for the harms that they cause collectively. Easier said than done, I know, but still worth the effort.
- Morgan Stanley agrees to pay the DOJ $2.6 billion to end investigation about its mortgage-backed securities deals during the financial crisis.
- MetLife settles with DOJ for $123.5 million for issuing mortgages that did not meet underwriting standards.
- State Farm will refund $352.5 million to customers for overcharging them for homeowners’ insurance.
- New York City apartment owners are suing Lexington Insurance Co. for failing to pay more than a third of its $95.3 million claims from Superstorm Sandy.
- Bank of America moves to dismiss Ambac’s $600 million claim that Countrywide issued faulty residential mortgage-backed securities.
Inside The GSEs quoted me in BofA MBS Lawsuit Settlement Shrinks List of FHFA Defendants (behind a paywall). It reads,
It’s only a matter of time before the remaining big bank defendants settle lawsuits filed by the Federal Housing Finance Agency over billions in non-agency mortgage-backed securities sold to Fannie Mae and Freddie Mac in the years leading up to the housing crisis, predicts a legal expert.
Last week, Bank of America agreed to a $9.3 billion settlement that covers its own dealings as well as those of Countrywide Financial and Merrill Lynch, which it acquired in 2008. The agreement covers some $57 billion of MBS issued or underwritten by these firms.
BofA did not admit liability or wrongdoing but it will pay $5.8 billion in cash to Fannie and Freddie and repurchase about $3.5 billion in residential MBS at market value. In return, FHFA’s lawsuits against the bank will be dismissed with prejudice.
The FHFA said it is working to resolve the remaining lawsuits regarding non-agency MBS purchased by the GSEs between 2005 and 2007. The suits involve alleged violations of federal and state securities laws and allegations of common law fraud. One week earlier, the Finance Agency announced that Credit Suisse Group had agreed to pay $885 million to settle a similar lawsuit.
Under the terms of that agreement, Credit Suisse will pay approximately $234 million to Fannie and approximately $651 million to Freddie. In exchange, certain claims against Credit Suisse related to the securities involved will be released.
So far, the FHFA’s lawsuits have recovered $19.5 billion in total payments. Expect more where that came from, said David Reiss, a professor at Brooklyn Law School.
“Every case is different and each institution has a different risk profile in terms of litigation strategy,” said Reiss. “The BofA settlement is so high profile because it’s Countrywide. It gives a lodestar when trying to figure out how low [defendants] can go in a settlement offer.”
Prior to the BofA deal, the FHFA had collected $8.9 billion in prior settlements. The Morgan Stanley settlement is the fourth largest of those settlements, behind Deutsche Bank, which agreed to pay $1.93 billion in December, and JPMorgan Chase, which reached a $4 billion settlement in October.
The bank defendants have repeatedly tried and failed to dismiss the FHFA suits on procedural grounds, including a claim that the cases were no longer timely.
In October, the U.S. Supreme Court declined to hear an appeal from the banks, prompting the expectation in legal circles that few, if any, of the remaining cases will ever go to trial.
“I don’t think that if you are a [big bank] defendant, that you see a particularly favorable judiciary,” said Reiss. “You see that the government is able to reach deals with companies in front of you and I think you’re thinking about settling.”
Entities that have yet to settle non-agency MBS claims with the FHFA include Barclays Bank, First Horizon National Corp., Goldman Sachs, HSBC, Nomura Holding America and the Royal Bank of Scotland.