A Wall Street Journal column by Nick Timiraos does a decent job answering the question “Why is the federal government suing 17 of the largest financial institutions in the world?”
The (very) short answer: These lender sold mortgage bonds to Fannie and Freddie, but misrepresented their quality — you know, the whole ‘AAA rating on a mortgage sold to a guy without a job’ thing.
Didn’t Fannie and Freddie know full well what they were buying? That will be one of the big debates in the lawsuits. Banks are already arguing that Fannie and Freddie were among the world’s most sophisticated analysts of mortgage credit and risk. They’re also alleging that Fannie and Freddie have already conceded in the past that the sharp plunge in home prices and the economic recession led to the losses on many of these securities.
But if lawyers for the firms’ regulator can show that the banks committed fraud, by misrepresenting the quality of the loans backing the investments and concealing the risks of these loans, then it may not matter that Fannie and Freddie were the smartest guys in the room.