In another move that is bound to keep financial stocks down for the short term, the United States government is suing the big banks. The government is trying to collect money from the mortgage backed securities that were packaged together and sold off in secondary markets. The government is claiming that banks failed to perform their fiduciary duties and were negligent in doing their due diligence. The timing of the lawsuit makes absolutely no sense.
Why is the government suing the banks now? Banks are already being forced to buy back many of the bad mortgage backed securities that they issued. The financial system is still weak and banks are already not lending money. Now the government is looking for the banks to reimburse them for the bad loans that Fannie Mae and Freddie Mac purchased. Why would the government sue the big banks at this point?
The government is aggressively going after the sector that it propped up just over two years ago.
Financial stocks will never be able to fully recover until all of these lawsuits stop. The major banks are being sued on every hand. Investors, institutions, and now the government is suing these institutions. Investors are scared to invest in bank stocks because there is absolutely no certainty as to the number of lawsuits that will emerge. The litigation seems to be endless and is crippling the sector.
On the one hand, the government is telling banks to lend more money and provide relief to homeowners that are behind on their mortgages. One the other hand, government regulators are telling the banks to hold onto excess reserves in case the economy continues to deteriorate and the economy weakens. Banks are in a no win situation. The big banks need certainty and that is the last thing that they have right now. They will continue to sit on cash until the lawsuits stop and the losses wane.
Expect more weakness from this sector over the next few months. All of the banks on the government’s hit list will be punished. Reports from MarketWatch indicate that Bank of America, JP Morgan Chase, and Goldman Sachs are named in the suit along with at least nine other banks.
The ratings agencies and banking executives are getting very nervous right now. They may be the next groups to find themselves subject to lawsuits.