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Are Fannie and Freddie Going to Sue Wall Street?

Posted by Larry Doyle on July 12, 2010 3:21 PM |

Are there some dark legal clouds beginning to hover over the Wall Street landscape? How so? The threats of impending lawsuits are never a forecast any individual, entity, or industry care to entertain. Like it or not, Wall Street is beginning to get some ground cover in the forms of pending legal actions.

While a large mortgage investor, Cambridge Place Investment Management, recently filed a complaint against virtually every firm on Wall Street in the Massachusetts courts, today we see none other than our ‘wards of the state’ Fannie Mae and Freddie Mac preparing the initial steps to bring suit against Wall Street. Could it be possible that Fannie and Freddie would sue Wall Street? Is a potential lawsuit political cover for Uncle Sam? Who knows?

Either way, the propsects of subpoenas and litigation are never very appetizing. The Wall Street Journal sheds further details on this story in writing, U.S. Seeks to Recoup Fannie, Freddie Losses:

The federal regulator of Fannie Mae and Freddie Mac is taking initial steps to recoup some of the billions that the mortgage-finance titans lost when they purchased large amounts of mortgage securities from Wall Street banks during the housing boom.

The Federal Housing Finance Agency on Monday said it had issued 64 subpoenas to unnamed firms in an effort to uncover misleading statements that Wall Street banks and others may have made when they bought and packaged risky mortgages into securities. Fannie and Freddie were two of the largest investors in those securities.

The issuing of subpoenas marks the first step in any effort to force banks to repurchase mortgage securities that have fallen sharply in value. It also represents the latest effort by government regulators to pull back the curtain on the mortgage-securitization process that helped fuel the housing bubble.

Fannie Mae and Freddie Mac were taken over by the government in September 2008 through a legal process known as conservatorship, and the government has injected $145 billion to keep the firms afloat.

The initial losses that triggered the conservatorship were heavily driven by Fannie and Freddie’s losses on subprime-mortgage and other risky securities that the companies had bought from Wall Street firms in a bid to boost profits during the housing boom.

The FHFA said that it had opted to issue the subpoenas after being rebuffed in earlier efforts to collect loan files.

“By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the enterprises and thus taxpayers. If so, we will then make decisions regarding appropriate actions,” said Edward DeMarco, the agency’s acting director.

The action follows lawsuits filed over the past year by the Federal Home Loan Banks of Seattle and San Francisco to rescind billions in purchases in mortgage-backed securities. The FHFA also regulates the home loan banks.

I am not holding my breath thinking that this lawsuit will lead to some sort of meaningful compensation for taxpayers. I have always viewed Fannie and Freddie as extensions of Capitol Hill. As such, I view a lawsuit by Fannie and Freddie against Wall Street equivalent to a divorce or fight amongst incestuous partners. Who knows if we will truly learn anything, but it may be entertaining.


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