US Government suing British and other banks

The news was out late on Friday 2nd September 2011 that US Government (through its Federal Housing Agency) is to sue 17 banks which includes at least 3 British banks. No points for guessing which three banks those would be but nonetheless HSBC, Barclays and RBS are those 'lucky' ones!

The three British Banks are collectively being sued for a grand US$ 41.5bn.

Besides these banks, there are other European Banks such as Deutsche, Credit Suisse, SocGen and the remaining are mostly US Banks.

What are they being sued for


The Government Agency alleges that at the time when the housing market was at its peak and everyone was making money, these banks misrepresented to the US mortgage giants of that time mainly Freddie Mac and Fannie Mae for the mortgages that were sold to them. Effectively, the practice in those days was to package a bunch of mortgages which were used to issue notes and then effectively sell those notes on to the investors. These notes were picked up by the two 'FM' and hence they incurred huge losses when the housing market came to a collapse. The Agency view is that the Banks packaging these mortgages and selling them onwards failed to do appropriate due diligence and hence misrepresented the quality of the assets being sold.

Immediate impact


The immediate impact would be a severe market downfall as one would expect given the market may anticipate the compensation included within these lawsuits to impact the individual bank's profitability. The amounts being huge the impact is going to be material and therefore a huge risk that each of the banks will miss their profitability and return targets that they have so promised to their shareholders.

Medium/ Long term impact


In my view, the analysts would wait and see how the law suit and the outcomes turns out to be. It may be a big impact to these banks severely impacting some of them to an extent that potentially we may see another banking crisis looming up! Although I hope it doesn't happen again as those of you who would remember the previous crisis (that hasn't fully gone yet) had severe impacts on jobs, markets and the general economic indicators.

The other potential impact could also be on the rating agencies as these packaged mortgages went through the process of being rated and mostly being rated AAA were then sold on to the market. The banks may argue their point on this basis and again a possibility that the lawsuit may fall on these rating agencies.

Whatever the outcome may be, I do not think it is going to help the world revive from their economic woes in the short term. I think it may also result in senior Government level negotiations potentially to save yet another bigger crisis that may just be around the corner!