Congratulations are in order to the Federal Housing Finance Agency, which has managed to bring a case to trial against Nomura Holdings and the Royal Bank of Scotland, two foreign banks with little U.S. reputational risk. This relatively obscure agency oversees Fannie Maeand Freddie Mac. Considering they have nowhere near the power of our federal regulators and prosecutors at our esteemed Department of Justice and the Securities and Exchange Commission, the victory is a strong step in the right direction.
A New York Times editorial (May 15, 2015), congratulated the government for its” big victory” against the two banks which had been deceiving investors about the mortgage securities they had been “peddling.” In no uncertain terms, a federal judge ruled that the “two banks misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained “numerous errors and misrepresentation.”
“The magnitude of falsity, conservatively measured, is enormous,” Judge Denise L. Cote of Federal District Court in Manhattan wrote in a scathing 361-page decision. “The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she wrote, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”
The Wall Street Banks were involved in the same behavior as the two banks in question, yet were not prosecuted by the DOJ and the SEC. How did this relatively obscure agency prevail when the SEC and DOJ sit on their hands regarding the Wall Street banks’ same “magnitude of falsity?”