Surprise! Looks Like Us Non-Bankers Were Right About the Bankers

Every since the 2008 financial crisis nearly imploded the whole global financial system, we non-bankers have been hoping for a perp walk in addition to the mounting array of fines.*

The bankers themselves have been adamant that they have done nothing wrong, pointing the finger of blame at lowered US interest rates after the dotcom bust in 2000, the flow of savings out of China, the long-standing US policy of increasing homeownership rates, Freddie Mac and Fannie Mae for encouraging "low-quality" buyers to invest in homes, and even the regulators (click here for a 2009 blogpost discussing this, and referencing an excellent Atlantic magazine piece by Simon Johnson).

We non-bankers remained skeptical.

And Monday, a federal district court judge in Manhattan sided with us against Nomura Holdings and Royal Bank of Scotland (RBS).

As Peter Eavis writes in a DealBook article for The New York Times today, the judge found that the "two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained numerous errors and misrepresentations."

The full 361-page decision can be found on the Times website, here. Right up front, the judge writes:

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous. [Emphasis added] 

Given the magnitude of the falsity, it is perhaps not surprising that in defending this lawsuit the defendants did not opt to prove that the statements in the Offering Documents were truthful. Instead, defendants relied, as they are entitled to do, on a multifaceted attack on plaintiff's evidence. That attack failed, as did defendants' sole surviving affirmative defense of loss causation. Accordingly, judgment will be entered in favor of plaintiff. 

The plaintiff is the Federal Housing Finance Agency (FHFA), the independent regulatory agency "responsible for the oversight of vital components of the secondary mortgage markets", mostly Fannie Mae and Freddie Mac (from their website, here).

Nomura and RBS were the only two banks included in this case because sixteen others settled with the government, paying, according to Eavis, "nearly $18 billion in penalties but avoiding public airing of their conduct."

The judge has asked FHFA "to submit a proposal for damages, which are expected to be about $500 million."

So, still no perp walk. But a lot more clarity.



* Fines: (n.) For bankers, "cost of doing business". Ugh. Me, I think close to $18 billion in fines is pretty clear evidence of a massive criminal operation (see previous post, here).