Judge’s Ruling Finds Bank Misconduct in ’08 Crash


We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Tuesday, May 19th, 2015

Last week there was an important court ruling against two banks from the Federal District Court in Manhattan related to the impact and role of the sales of securities backed by faulty mortgages in the housing crash of 2008.  The New York Times reported on this development.

To give the ruling some context, recall that in the years leading up to the crash, there was a frenzy to originate poorly underwritten mortgages which could then be packaged and sold as securities.  (These were the very mortgages that Consumers Union fought hard to end by outlawing the business practices that allowed lenders to sell predatory loans).  Of course, the securities were only as solid as the loans that were at their foundation.  When the loans started to fail in great numbers, so, too, did the value of the securities.  Those who packaged the faulty loans into the securities reaped all the benefits of the sales of the securities, but bore none of the risk when the underlying loans failed.  Thus, there was no incentive to originate and package quality mortgages, just lots of them– of whatever quality– that could then be passed along in this manner.  This very common practice was at the core of a very high-stakes game of hot potato, central to the 2008 financial collapse.

In this lawsuit, the United States Government successfully proved in a court trial heard before Judge Denise Cote that Japanese bank Nomura Holdings and Royal Bank of Scotland (RBS) misled Fannie Mae and Freddie Mac in selling mortgage bonds that contained numerous errors and misrepresentations and in doing so exacerbated the collapse in the housing market.  This is important because Fannie Mae and Freddie Mac are “the beleaguered government-sponsored enterprises” which had to be rescued by taxpayers in September 2008. This court ruling not only affirmed the role that Nomura Holdings and RBS practices played in the mortgage market collapse and the losses suffered by Fannie Mae and Freddie Mac, it also generated a 361-page court decision that provides an important glimpse into the inner dealings of the two banks, including the types of business practices that were at the heart of the mortgage meltdown.

Despite what the banks offered in their defense, the Court ruled that the banks’ practices played a key role in this dangerous and toxic period in the American economy.  Some notable excerpts from the Court’s decision include:

  • “The magnitude of falsity, conservatively measured, is enormous.”
  • “Nomura was competing against other banks to buy these subprime and
    Alt-A loans and to securitize them . . . Nomura’s goal was to work with the sellers of loans and to foster a good relationship with them. . . . Even when there were specific warnings about the risk of working with an originator, those warnings fell on deaf ears.”
  • Judge Cote found “disturbing examples” showing that Nomura was willing to package and sell defective loans.
  • “The only possible conclusion is this:  the Certificates sold to the GSEs [Fannie Mae and Freddie Mac] were supported by loans for which the underwriting process had failed.  Guidelines were systematically disregarded.”
  • Once the housing collapse started, “improperly underwritten loans were hit hardest and drove the collapse even further.  The evidence at trial confirms the obvious:  Badly written loans perform badly.”

You might be wondering what happened to those other banks accused of the similar wrongdoing According to the New York Times, Nomura Holdings and Royal Bank of Scotland “were the only two of 18 financial firms that took their case to trial . . . The other firms – including Goldman Sachs and Bank of America—settled, together paying nearly $18 billion in penalties but avoiding a detailed public airing of their conduct.”

The New York Times reports that Nomura Holdings plans to appeal the decision and that Judge Cote has asked the U.S. Government (Federal Housing Finance Agency which oversees Fannie Mae and Freddie Mac) to submit a proposal for damages and reports they are “expected to be around $500 million.”

What do you think about how the big banks are being treated after the financial meltdown?  Are they being held accountable for their role? Has enough been done?



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