U.S. said ready to sue big banks over mortgages

A federal U.S. agency is ready to sue more than a dozen major banks, arguing that they misrepresented the quality of mortgage securities they put together and sold in the run-up to the bursting of the housing bubble, the New York Times reported Friday.

The report said the Federal Housing Finance Agency, which oversees mortgage firms Fannie Mae and Freddie Mac, is expected to file the lawsuits in federal court Friday or Tuesday. The agency is expected to seek billions in compensation.

The suits are aimed at Bank of America Corp. BAC -6.20%  , Goldman Sachs Group Inc. GS -1.29%  , J.P. Morgan Chase & Co. JPM -1.98%  , Deutsche Bank AG DE:DBK -3.87%   DB -2.54%  and others, the report said, citing three unidentified individuals briefed on the matter.

The FHFA will argue that the banks failed to meet their due-diligence duties under securities law and failed to spot evidence that borrowers’ incomes were overstated or falsified, the report said. The securities backed by the mortgages quickly lost value when many borrowers proved unable to meet payments.

The lawsuits aim to secure reimbursement for losses on securities held by Fannie and Freddie. Private investors have attempted to force banks to buy back mortgage-backed bonds.

The report sent Asian and European equity markets lower and was weighing on U.S. stock futures. Shares in Deutsche Bank DE:DBK -3.87%  fell more than 4% in Frankfurt, dragging the German DAX 30 index DX:DAX -2.91%  down 2.7%. 

“The U.S. banking sector has already suffered a massive loss of confidence and remains incredibly fragile,” said Kathleen Brooks, research director at Forex.com, in emailed comments. “This lawsuit and the massive sums involved may aggravate the problem and cause another leg lower in the financial sector.”

Spokespersons for Bank of America, Goldman Sachs and J.P. Morgan declined comment, the report said.

Spokespersons for the banks weren’t immediately available Friday to respond to requests for comment on the story.

A spokesman for Deutsche Bank told the newspaper that the bank “can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

The report noted that financial executives have privately argued that losses on mortgage-backed securities were the result of a broad downturn in the economy and the housing market rather than how the mortgage securities were structured.

Japan’s new prime minister faces tough challenges

Finance Minister Yoshihiko Noda emerged as a surprising but seemingly welcome victor in the contest to become Japan’s sixth prime minister in five years on Tuesday, although he will likely face several potential stumbling blocks as leader.

Noda replaces Naoto Kan who resigned last Friday, as he had promised after the Japanese parliament passed a bond-issuance bill and renewable-energy bill.

As well as spearheading reconstruction efforts following the earthquake, key challenges for the 54-year old Noda will include managing the country’s massive debt pile and keeping the yen — currently at levels where profits for exporter firms are often hampered — in check.




“Noda is a strong advocate of tax-funded fiscal reform. He champions hikes in income, corporate and other ‘core taxes’ to pay for reconstruction, and seeks a higher consumption tax to fund future social-security obligations,” said Seiji Adachi, an economist at Deutsche Bank.




Still, those fears may be unfounded. The Nomura analysts said, assuming that income tax is hiked by 10% from 2013, they estimated that the impact on real gross domestic product growth would be just 0.03 percentage points in 2013 and 0.06 percentage points in 2014.

Noda was reportedly helped to election victory by the support of lawmakers unhappy with the idea of power broker Ichiro Ozawa gaining more influence within the party.

The Barclays Capital strategists said.that if Noda attempts to resolve the split within the DPJ between pro- and anti-Ozawa forces, then that “could harden the rift between the ruling and opposition parties, and vice versa.”

In that situation, support for the DPJ could wane, lead to dissolution in the lower house and increase the probability of an election in 2012, they said.

On the other hand, if Noda focuses on reconciling the DPJ and opposition parties, then that will mean he’s likely concentrating on smoothing the path for implementing two extra budgets related to earthquake-reconstruction spending, they said.