Litigation issues related to mortgage securities seem far from over for the Wall Street big shots. Now, according to a Wall Street Journal report, the Federal Deposit Insurance Corp. (“FDIC”) is chasing a number of banks including Bank of America Corp. (BAC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) over the sale of mortgage securities that were issued by these institutions and purchased by two failed banks, which were subsequently taken into custody by the Federal body in 2009.
The Allegation
The FDIC has filed three separate lawsuits in the federal court and alleged these banks for misleading investors through misrepresentations of risks associated with the securities that were backed by pools of mortgage loans.
As a receiver for Strategic Capital Bank, FDIC filed two suits while the third was filed by it as a receiver for both Citizens National Bank and Strategic Capital Bank. In total, at least about $92 million of damages have been sought.
Our Take
Post financial crisis, several lawsuits have been filed by the FDIC against banks and their executives for conducting fraudulent activities that have led to the financial crisis and triggered several bank failures. Notably, in last December, FDIC settled for around $65 million with Washington Mutual’s three former executives who are said to be involved in such conducts that resulted in its failure.
We believe such an effort on part of the FDIC would check fraudulent activities by the banks and reduce bank failures in future. Lesser fraudulent activities would also help in banks facing reduced litigations and incurring less fund outflows as damages.
It would also involve lesser amount of taxpayers’ money in saving banks from collapsing and would give a fillip to investors’ confidence on the regulatory framework and the financial sector overall.
