Justice Department to sue BofA over alleged Countrywide mortgage fraud

The news this week for Bank of American keeps getting worse. Today the Justice Department announced it was filing a lawsuit against the bank. The suit alleges that Countrywide Financial, formerly the country’s largest private mortgage lender, generated thousands of fraudulent mortgage loans and then sold them to Fannie Mae and Freddie Mac, the government institutions that underwrites mortgages for millions of American homeowners. The suit further alleges that the practice of streamlining and generating those fake and risky mortgages continued even after Bank of America purchased Countrywide in 2008.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” said Preet Bharara, the United States attorney in Manhattan.

Those transactions became the tipping point of the “subprime” mortgage disaster that led to the Great Recession and the bankruptcy of some of the nation’s largest financial institutions including Countrywide and Lehman Brothers. The Justice Department is seeking $1 billion in damages for the actions of the bank for selling these knowingly “toxic” assets to the Fannie and Freddie, which then became insolvent and required taxpayers bailouts under the TARP program. The financial problems of these two housing lenders also led to thousands of foreclosures on the homes of American families.

The Countrywide case is a new addition to several other lawsuits being pursued by the government against Wall Street firm and financial institutions. For example, last year the Federal Housing Finance Agency sued 17 banks over losses sustained by Fannie Mae and Freddie Mac, and is relentlessly calling on firms like Bank of America to repurchase billions of dollars in the bad loans they fraudulently sold to the government-controlled housing lenders.

Bank of American did not have an immediate comment. The news will be disappointing to its shareholders as it comes in the same week the bank announced that its profits had declined by 95 percent in the third quarter. The new the lawsuit represents yet another obstacle to the financial solvency and longevity of the country’s second largest bank.

BofA posts slight profit, but still struggles to find financial footing

The nation’s second largest bank continued its struggle to find stability in the wake of the Great Recession. Bank of America announced a slight $340 million profit in the third quarter of this fiscal year yesterday. The slight profit, however, amounts to 95 percent decrease from last year, signaling that large financial institutions remain weak four years after they almost collapsed.

The precipitous drop in Bank of America’s earnings comes after a settlement last month with the Justice Department and investors over its takeover of Merrill Lynch during the financial crisis. The bank announced the $2.43 billion settlement after accusations by shareholders that it misled investors about the financial health of Merrill. The settlement is the largest securities class-action lawsuit following the financial crisis.

The acquisition of Merrill was not the only one to saddle the bank with financial problems. In 2008 it also purchased the troubled mortgage lender Countrywide Financial. Both Merrill and Countrywide were implicated in trading toxic assets and relying on complex financial instruments for risky investments that created the financial crisis. The Countrywide acquisition occurred as the subprime mortgage bubble was imploding, and it is estimated that the purchase of the troubled mortgage lender cost Bank of America more than $40 billion in losses over four years.

Starting in 2009, Bank of America began cutting its expenses by closing branches, selling billions in assets, and cutting thousands of jobs. The announcement of a slight profit yesterday was therefore touted by the bank as a kind of victory, but the reality is that America’s largest financial institutions remain unstable and continue to struggle in the post-recession economy.

Moody’s downgrades world’s banks

In 2011, a Congressional Report was released exposing those financial institutions responsible for the recession. The finger was pointed squarely at large investment banks as well as credit rating agencies for colluding to undermine the checks and balances that are supposed to keep the latter impartial, so that investor’s can be confident their evaluations of the former are accurate.

The report found that both Moody’s and Standard and Poor’s were both complicit in rigging scores for those banks, as well as the toxic financial products they were selling to investors. Both agencies knew that banks were off-loading toxic assets in investment bundles that were bogus, but gave those same products high scores in order to attract investors to them. As a result, hundreds of billions of dollars of other people’s money was lost, banks made out big by betting against these toxic assets in the derivatives market, and credit rating agencies made large bonuses from those banks for their part in perpetuating lies to the public

What a difference a year makes. Yesterday, Moody’s announced it was downgrading 15 of the world’s largest financial institutions, including several major U.S. banks such as Citigroup and Bank of America. Once cozy in their collusion with these agencies, banks reacted swiftly and disingenuously to the news. Citigroup accused Moody’s of doing poor research and advised its investors to search for other agencies with credit ratings more favorable to it (and therefore probably false). The bank released a statement to the effect that Moody’s “fails to recognize Citi’s transformation over the past several years…Citi strongly disagrees with Moody’s analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted.”

Along with Citigroup and Bank of America, Moody’s evaluated 13 other banks:  Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Crédit Agricole, Société Générale, Royal Bank of Canada, and Royal Bank of Scotland.

Analysis was based on firms’ capital ratios and whether they would be able to survive so-called “stress tests” modeling another severe recession. Many of the largest U.S. banks failed those tests, or were close to failing, prompting the downgrade in their credit ratings.

For consumers, homeowners, small business owners and retirees the downgrade is too little, too late. In election year politics relief for these stakeholders has also been slim to none. Democrats and Republicans alike play the blame game on one another, pandering for emotionally-charged votes, while members from both parties take significant amounts of cash from the financial industry, which has one of the largest armies of lobbyists in Washington to ensure very little is done to regulate it.

The move by Moody’s is good, and reflects a long-overdue divorce between two industries that should not be in bed together. Whether the long-term effects of this downgrade will mean more accurate information and better oversight remains doubtful without aggressive political action to curtail the greed Wall Street has substituted for the public agenda.