We’re near the end. With the news Wednesday that Bank of America will pay AIG $650 million to settle their long-running and many-tentacled litigation over mortgage backed securities –along with a report in The Wall Street Journal that the credit rating agency Standard & Poor’s is contemplating a $1 billion settlement with the Justice Department for its MBS rating failures — it’s time to declare the twilight of financial crisis litigation.
Yes, there’s still some big work to be done, including BofA’s anticipated multibillion-dollar settlement with the Justice Department; the resolution of the Federal Housing Finance Agency’s last few cases on behalf of Fannie Mae and Freddie Mac; and dozens of private-investor breach-of-contract suits against the banks. But that’s the denouement, the last act.
So what have we learned, after six years of intense and expensive litigation? To me, the clearest lesson from financial crisis litigation is that investors cannot rely on anyone else’s assurances about complex securities.
Federal securities laws say otherwise, of course. Issuers and underwriters are supposed to disclose the risks built into the securities they’re selling. Credit rating agencies are supposed to provide realistic assessments of investment quality. State and federal regulators are supposed to make sure all of them are living up to their representations and to seek justice for investors if it turns out they’ve been deceived.
The first few years of MBS litigation, dominated by investor class actions and bond insurer suits against issuers, exposed the gap between bank representations about underlying mortgage loan pools and the pools’ actual risk profiles. After re-underwriting sample loans, MBS plaintiffs claimed breathtaking breach rates, asserting in case after case that 30, 50, 60 or even 70 percent of the mortgages underlying MBS trusts were deficient for one reason or another.