|  | | 2007 News and Press Releases | | |
HEADLINE NEWS:
Mortgage-Industry Lawsuits: The Finger Of Suspicion, Looking for the crime in subprime; In America and elsewhere trial lawyers, state prosecutors and regulators look for the crime in subprime
Staff Writer
Economist. December 22, 2007
_________________________________________________________________________
EXCERPT: FINANCIAL firms have already been drenched by mortgage-related losses. Now a wave of litigation threatens to assail them. According to RiskMetrics, a consulting firm, between August and October federal securities class - action lawsuits were filed in America at an annualised pace of around 270--more than double last year's total and well above the historical average. At this rate, claims could easily exceed those of the dotcom bust and options-backdating scandal combined. At most risk are banks that peddled mortgages or mortgage-backed securities. Investors have handed several writs to Citigroup and Merrill Lynch. Bear Stearns has received dozens over the collapse of two leveraged hedge funds. A typical complaint accuses it of failing to make adequate reserves or to explain the risks of its subprime investments, and of dubious related-party transactions with the funds. Several firms, including E*Trade, a discount broker with a banking arm sitting on a radioactive pile of mortgage debt, are being sued for allegedly failing to disclose problems as they became apparent to managers. But one thing that sets the subprime litigation wave apart from that of the 2001-03 bear market is its breadth. After the collapses of Enron and WorldCom, lawsuits were targeted at a fairly narrow range of parties: bust internet firms, their accountants and some banks. This time, investors are aiming not only at mortgage lenders, brokers and investment banks but also insurers (American International Group), bond funds (State Street, Morgan Keegan), rating agencies (Moody's and Standard & Poor's) and homebuilders (Beazer Homes, Toll Brothers et al). … Banks that face lawsuits over mortgage debt they peddled have at least one strong argument in their favour: they themselves bought the stuff. Both Citi and Merrill, for instance, held on to the senior tranches of CDOs, which have since gone bad. Would they have done this knowing that the securities were potentially so toxic? On the other hand, plaintiffs' lawyers say there are plenty of examples from recent months of banks and companies that have run aground even after stating in calls with investors that they had safeguards in place. As busy as the lawyers are, they are only warming up. Scrutiny of the way banks account for tainted securities is just beginning, as is the task of poring through e-mails provided under subpoena. And as pain spreads to other securitised products, such as car and credit-card loans, they too will come under the spotlight. The ultimate cost of the mortgage crisis in terms of settlements, awards and legal fees can only be guessed at. But the consensus view is that payouts will climb well above the billions stemming from the internet bubble. |
|
|
