Targeted Freddie Mac Sues Banks For LIBOR Fraud/Collusion

This looks bad for the banks.

Freddie Mac (FMCC) sued Bank of America Corp., UBS AG (UBSN), JPMorgan Chase & Co. (JPM) and a dozen other banks over alleged manipulation of the London interbank offered rate, saying the mortgage financier suffered substantial losses as a result of the companies’ conduct.

Manipulation of interest rates by some of the world’s biggest banks has spawned probes by half a dozen agencies on three continents in what has become the industry’s largest and longest-running scandal. More than $300 trillion of loans, mortgages, financial products and contracts are linked to Libor.

“To the extent that defendants used false and dishonest USD LIBOR submissions to bolster their respective reputations, they artificially increased their ability to charge higher underwriting fees and obtain higher offering prices for financial products to the detriment of Freddie Mac and other consumers.” Freddie Mac Sues Multiple Banks Over Libor Manipulation – Bloomberg.

This is happening at the same time Fannie and Freddie are targeted for possible replacement or just dismantling without replacement by any new governmentally sponsored enterprise.

From The Washington Post:

What comes after Fannie Mae, Freddie Mac? Little consensus at hearing on mortgage giants - The Washington Post

Ed DeMarco, Federal Housing Finance Agency

Republicans and Democrats on the House Financial Services Committee agreed that it was time for them to draft legislation for replacing Fannie and Freddie. Yet their comments suggested a wide gulf on how they plan to do it.

The chairman of the panel, Rep. Jeb Hensarling (R-Tex.), suggested that he finds the companies culpable for the financial crisis in the first place and would be skeptical of any new plan that involves a significant role for government.

“After 41 / 2 years,” Hensarling said, “inaction is no longer an option, because [Fannie and Freddie] were at the epicenter of the financial crisis. They were part of a tragically misguided government policy to incentivize, browbeat and mandate financial institutions to loan money to individuals to buy homes they could not afford to keep.”

To be fair to Fannie and Freddie and informative for our readers, Wall Street investment and other banks made more bad loans than ended up being securitized by Fannie and Freddie. Many bad loans by Wall Street were subsequently forced to be taken back by a number of those Wall Street houses, which included many traditional commercial banks.

That said, it is true that Fannie and Freddie failed to do adequate due diligence but were rather swept up in the frenzy, though later to the game than were the Wall Street banks. They relied too much upon private rating agencies too, which agencies did an exceptionally careless job and were highly paid by the Wall Street firms receiving AAA ratings on toxic securities, toxic because they were the result of commingling truly good risks with no-doc and liar’s loans.

Proper risk-management dictated that no-doc and liar’s loans should never have been mixed in with loans made under proper lending standards.

No-doc and liar’s loans were not invented by either Fannie or Freddie but rather the fully private sector.