A Protest In London

Although it was far too long in coming, it seems the American people may have justice at last. On Friday the Federal Housing Finance Agency announced that it has filed suit against 17 financial companies, including major banks like J.P. Morgane Chase and Bank of America, for “negligent misrepresentation, securities laws violations, and common fraud,” according to the article at the Forbes link above.

The suit alleges that the lenders lied about the underlying quality of mortgage backed securities (MBS) which they sold to Fannie Mae and Freddie Mac, two entities used by the Federal government to guarantee home loans.

In a nutshell: the government is claiming the lenders lent money to home buyers who could not afford to repay the mortgages, then sold the future value of those loans to Fannie Mae and Freddie Mac while knowing that the loans could not be repaid.

The facts behind these lawsuits are not news, of course. We have known for years that banks knowingly made so-called “non-qualifying mortgages” which required no verification of the borrowers’ ability to repay, and “adjustable rate mortgages” with future increases in payments that borrowers could not pay. The banks made billions in origination fees and other “points” when these loans were first written, and then they made billions more when they “sold” the loans as mortgage backed securities to third parties, such as Freddie Mac and Fannie Mae.

The heartbreak caused by these actions is impossible to calculate. Seniors losing their retirement nest eggs, families forced to leave their homes, and parents without jobs are just a few of the immediate results. All so a few men and women, mostly in places like Manhattan and Newport Beach, could make billions.

Of course, the lenders will claim they did not know these mortgages were so deeply flawed. And they will argue that it was the home buyer’s responsibility to tell the truth when applying for the non-conforming loans, and to budget properly to cover those astronomical payment increases on adjustable rate mortgages. It’s the same old “let the buyer beware” mentality that every con artist has fallen back on throughout the centuries.

Most of the people who took out these loans are unsophisticated when it comes to finances, while the people who sold the loans are highly sophisticated. In such a situation, basic ethics and morality dictate that the burden of responsibility should rest most heavily on the party with the knowledge, training and experience. If this were not so, patients would have no right to rely on doctors’ advice when taking medications, or car owners would not be able to hold mechanics responsible for replacing parts not actually broken. So we applaud the government’s decision to file suit against these lenders.

We do, however, have two complaints.

First, we believe this should have been done in 2009, before the American public became so utterly disillusioned with our financial system. Justice delayed is justice denied, and had this been done sooner consumer confidence might have recovered long ago.

Second, we believe the government should go further, by prosecuting the specific individuals at the highest levels who worked at these financial businesses, made the decisions to take these actions, and then paid themselves billions of dollars in bonuses which were funded by taxpayers.

At the time, we were told they had done nothing illegal. These new lawsuits prove the government thinks otherwise. If these companies are found guilty of these charges, it stands to reason the people who caused these actions by the companies are culpable. These Wall Street sharks are the moral equivalent of Mafia bosses. They personally made billions of dollars through massive fraud, and the money they stole came straight from the pockets of American borrowers, savers and taxpayers. They should be held personally accountable.

Of course, that’s not likely to happen. In one of life’s more ironic twists, it’s well known that the more you steal, the less likely you are to be held accountable as a thief, even though the whole world knows what you did. But let us take some solace in the fact that every thief will be held accountable eventually.

“It is mine to avenge; I will repay. In due time their foot will slip; their day of disaster is near and their doom rushes upon them.” (Deuteronomy 32:35 NIV)