Late last night, The New York Times reported that the federal government is preparing to sue at least 12 major banks by Tuesday, and the news is already hammering bank stocks. The agency readying the suit, the Federal Housing Finance Agency, oversees the mortgage firms Fannie Mae and Freddie Mac and will likely seek billions in compensation from Bank of America, JPMorgan Chase, Goldman Sachs and others for peddling mortgage-backed securities that ended up being junk. The Times describes the suit as follows:
The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
Here's how the banks' stocks are doing in early trading and how a pending suit could affect the banks' impending mortgage-bond settlement with investors:
Bank stocks are taking a big hit In early morning trading, Bloomberg reports that Bank of America fell 7.5 percent, JP Morgan Chase dropped 2.1 percent and Deutsche Bank slipped 4.8 percent. "This market is all about credit and banks right now," a strategist for AMP Capital Investors, which manages almost $100 billion, told Bloomberg. He said a pending lawsuit "is an uncertainty that can go on for years -- that gets the market quite nervous. Bank of America, being at the epicenter of these problems, is going to get smashed."