Saturday, September 03, 2011

So the sheepdog has turned and bitten the sheep!

I seee that the Federal Housing and Finance Authority (FHFA) has launched mortgage-related lawsuits, worth nearly USD 200 billion, against 17 US and European banks - including JPMorganChase, Royal Bank of Scotland, Countrywide Financial, Merrill Lynch, Deutsche Bank, Credit Suisse, Goldman Sachs and Morgan Stanley.

This is ironic, considering that it was the US Government's Dept of Housing and Urban Development (HUD) which invented sub-prime securitisation and pushed it and persuaded banks to go in for it even when it was arguably illegal to do so! The practice remained technically illegal (even though "everyone was doing it") till the 1999 revocation of the Glass-Steagall Act - so the Administrations (from both Democrat and Republican parties, in turn) first encouraged breaking the law, and then changed the law in 1999

And it was the FHFA's predecessor body, the Office of Federal Housing Enterprise Oversight (OFHEO - an Agency within HUD!!!) which, if it did not actually cajole FannieMae and FreddieMac into going into sub-prime securitisation, at the very least signally failed in its official duty of ensuring the capital adequacy and financial safety and soundness of FannieMae and FreddieMac...

If the 2 FMs had not gone in the direction they did, it is doubtful that the housing bubble would have happened

Of course the housing bubble was only one of the many bubbles that was around at the time that the current crisis started (2007). The puncturing of that bubble I put down firmly to the speculation that drove the price of oil so high that the consequent rise in transport and commodity costs made it impossible for sub-prime mortgage holders (who were doing fine till then) to continue to maintain their mortgage payments, thus triggering the crisis.

Well, whatever the history, and however ironic it is, expect more fun and games to result from this suit, as the share price of banks (not only of the 17 targeted by FHFA) is hit by this action, which will have domino effects on their need for recapitalisation, and will create further uncertainty regarding the legal environment for finance and business - and, in the medium term, not only in the US.
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