THE BASIS POINT

Banks Aren’t Lending Enough Because Their Lawyers Get All The Money

I should have listened to my mom and become a lawyer. As WaMu was collapsing in 2008, the FDIC brokered a good deal whereby they seized WaMu then JP Morgan Chase bought it for $1.9b. But the speedy two-day deal now leaves a giant question: who should cover billions in WaMu legal liabilities? Chase says it agreed only to take liabilities on WaMu’s books during the handoff—which didn’t include lawsuit costs. The FDIC, which is supported by bank contributions or taxpayers (depending on who you ask), says Chase agreed to buy all of WaMu…the good and the bad. So now large investors are suing and claim WaMu misrepresented risk in the mortgage securities it sold them. Deutsche Bank National Trust represents the investors and filed suit against the FDIC and Chase, claiming $6-$10 billion in damages for violating contracts. Oh the attorney fees.

We also learned this week that Bank of America won a dismissal, or at least more time, for a similar investor lawsuit against Countrywide—which BofA saved in 2008. The judge gave investors 30 days to revise and re-file. According to Bloomberg, the judge stated that “this was all too complicated to figure out” and slammed her gavel down. Just kidding. The judge said investors didn’t sufficiently demonstrate they suffered an injury for the securities they bought and that the statute of limitations had expired for some claims. The investor suit claimed documents for mortgages Countrywide originated and securitized contained misrepresentations, omissions, and didn’t follow the lender’s own guidelines. Those failings must be addressed in the new complaint. BofA said that the judge narrowing the scope of claims means securities in the case could decline from 427 offerings valued at about $352 billion to about 22 offerings valued at about $31 billion. All of this grey area liability is why banks aren’t lending like they should—they need to pay all these lawyers to figure out what all these lawyers got paid to do before.