Banks Plummet on Latest Legal Attacks

Brittney Barrett  |

Major banks plummeted today after the federal agency overseeing mortgage goliaths Fannie Mae and Freddie Mac announced its decision to file multiple law suits again several key financial institutions. The agency asserts that the banks misrepresented the mortgage securities sold leading up to the massive housing bubble, causing the institutions to bear the brunt of the failed securities. The organizations intend to sue Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM) and Deutsche Bank (DB), among others for billions in compensation.

The banks have already put paid out billions in lawsuits of the same nature but this could be the biggest yet and continue to cripple the already ailing institutions. Only last week Warren Buffett’s Berkshire Hathaway invested $5 Billion in Bank of America to protect in an event a suit of this nature occurred.

Fannie Mae and Freddie Mac are arguing that the firms were negligent in their due diligence or overlooked evidence of falsified income supplied by the mortgage applicants.

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The suits, filed Friday, led the entire sector lower for the day with Bank of America (BAC) leading losses after being knocked down 8.34 percent following the news. Deutsche Bank (DB) was also down around over 5 percent for the day while other banks including Citi (C) and Goldman (GS) were both down around 4.5 percent.

The losses will likely continue to thwart the performance of the institutions which have struggled on the ongoing weakness of the housing market and slow unemployment improvements. The lowering of the U.S. credit rating from a pristine triple A to AA+ struck fear in investors who worried it would impact the way they did business and lead to further losses.

The lawsuits, which are being filed against 12 separate institutions, occur shortly before the final cutoff for related legal action. The move can be predicted to have a deleterious impact on investor interest in the sector until a settlement is reached.

The degree of losses in the banks today appeared to correlate both with the recent public personas and attitudes investors have toward banks as well as their exposure and preparation for this type of legal action.

Bank officials are arguing against the action, insisting that additional legal entanglements will further excaberate the plodding speed of the economy recovery and especially delay progress in the housing market.  Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

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