Banks face federal lawsuit over bad mortgages

Signing a mortgage

Kai Ryssdal: Next week is the third anniversary of the demise of Lehman Brothers, which makes it also the third anniversary of the shotgun marriage between the government and a whole lot of this country's banks. Suffice it to say, some couples therapy might be warranted.

Today, a key government regulator filed suit against a bunch big banks -- Bank of America, JPMorgan, Goldman Sachs, you know, the usual suspects -- accusing them of stuffing mortgage-backed securities with mortgages that had no business being turned into bonds. Mortgages they knew would go bad.

There's something to be said for punishing bad behavior, but at what point does going after the financial industry hurt more than it helps? Our New York bureau chief Heidi Moore reports.


Heidi Moore: The U.S. government has taken the same approach to banks as doctors usually take with patients: First, do no harm. In fact, the banks have gotten a pretty sweet deal in bailouts and stimulus.

But now the bills are coming due. Some parts of the government are suing the biggest banks. Which raises the question: Will the effort to make banks pay for the crisis end up hurting all of us?

Chip MacDonald, a lawyer for the firm Jones Day, says yes.

Chip MacDonald: I'd sort of like to see the mortgage market restored to health as opposed to fighting battles from three years ago, four years ago.

MacDonald says more expensive lawsuits will end up hurting consumers because banks will recoil and lend even less; that would make it even harder to get a mortgage.

And then are those who say the economy can't take more doom and gloom. Ernie Patrikis is a former Federal Reserve official who now advises banks at White & Case.

Ernie Patrikis: If we could just think about it in terms of the financial system, it just continues the cloud over the marketplace. For the country as a whole, it's not helpful.

But consumer advocates say the bad news facing banks is karma. Norma Garcia, the chief lawyer for the Consumers' Union, says many banks reneged on their deals to boost lending and stop unnecessary foreclosures.

Norma Garcia: The taxpayer stepped in to bail out the banks to keep them from failing. The banks were given an opportunity to do the right thing and they failed to do so once again.

It remains to be seen whether another lawsuit will do the trick.

In New York, I'm Heidi Moore for Marketplace.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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