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Why Are Big Banks Going To War With A Federal Judge?

Memo Pad

Why Are Big Banks Going To War With A Federal Judge?


The nation’s largest banks have devised a novel way to protect their interests and save themselves from hundreds of billions of dollars in legal exposure. They’re taking a judge to court.

Lawyers for 17 banks submitted an unusual filing in the Second Circuit Court of Appeals this week (just listing all the corporate lawyers involved takes up the first four pages). The banks – including JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley – stand accused of ripping off the mortgage giants Fannie Mae and Freddie Mac. The Federal Housing Finance Agency, Fannie and Freddie’s conservator, alleges that these banks improperly sold $200 billion worth of mortgage-backed securities without disclosing the shoddy underwriting of the underlying loans. FHFA argues the banks knew the loans in the securities were bad, yet sold them to Fannie and Freddie anyway, leading to massive losses and the need for a government bailout. So FHFA wants the banks to buy back the securities they improperly sold under false pretenses.

U.S. District Court Judge Denise Cote took over the case in December, 2011, and quickly made a series of rulings in the case, first denying a motion by the banks to dismiss the lawsuit. The bank lawyers have become so dissatisfied with Cote’s rulings, in fact, that they have asked the Second Circuit to reverse them. The filing calls for a “writ of mandamus” that would throw out a series of rulings around discovery, which the bank lawyers claim “deprived Petitioners of their right to obtain evidence.” (You can chew for a moment on the idea that banks are being deprived of their rights.)

Specifically, the banks want access to evidence on a separate unit of Fannie and Freddie’s business that stands apart from the traders who purchased the mortgage-backed securities. They want to raise the limit of depositions of the plaintiffs in the case – questions for executives at the FHFA, Fannie Mae and Freddie Mac – from 20 to 400. They want the judge to lower the threshold for relevance to collect evidence on the specific claims of fraud and punitive damages. All of these efforts by the banks would significantly lengthen the discovery phase of the trial, and could represent a fishing expedition, with the lawyers trying every tactic to muddy the core issues in the case.

What’s really surprising is that the banks would try to go over the head of Judge Cote, who will eventually have to preside over the case. Normally you wouldn’t try so hard to piss off a presiding judge and get a higher court to reverse her rulings. In the filing, the banks take pains to call Judge Cote “an experienced jurist,” but say that they simply must seek the writ of mandamus because of her “gravely prejudicial rulings.”

What’s really going on here?  The banks are frightened about their legal exposure. A loss at trial would lead to a multi-billion-dollar payout to FHFA. But even a cash settlement (which the banks claim Judge Cote, by her rulings, is trying to coerce) would likely trigger a wave of private litigation. Every investor who ever bought a mortgage-backed security would have a roadmap for recouping losses. Large banks are already on the hook for $100 billion in legal costs from their actions during the financial crisis. An adverse ruling in the FHFA case, and those costs would rise much higher.

This weighs on the banks’ stock prices, as investors steer clear of entities absorbing billions in losses every quarter. They want to limit their obligations wherever possible. And if that means suing a judge, so be it.

Photo: Matthew Knott via Flickr.com


  1. howdidisraelget200nukes March 29, 2013

    All Obama needs to do is use the Sherman Act to break up the banks.

    That will not happen because he is looking forward to all of those board of directors positions that pay a couple of million per year each.

    why else would he sign the extension to the bush tax cuts?

    1. idamag March 29, 2013


    2. Steve Kester March 30, 2013

      You make it sound so easy that your claim falls flat. Obama will take on what he knows he can move forward. It most likely won’t be enough given how deep we are buried but he will leave office and the country in better shape than he found it.

      1. ralphkr March 31, 2013

        It would be extremely difficult not to leave the country in better shape than Bush left it. Come to think of it, I bet dollars to donuts that a Republican president could accomplish that with ease as that is their forte: screwing the economy.

      2. howdidisraelget200nukes April 1, 2013

        I guess you must be right but truthfully, I did not come up with this on my own.

        Thom Hartmann said it. I guess he must just be stupid.

        Then again, Teddy Roosevelt did it to Standard Oil so there is a precedence for this, unless you are dinking that Kool-Aid.

  2. idamag March 29, 2013

    The founding fathers warned against money taking over the government. We had a president who was strong enough and brave enough to break them up once before – Theodore Roosevelt. We are losing our democracy to these greedy bstds. Wake up America. This is serious. There has been a lot of money and a lot of effort put into turning American people against their own government so it can be destroyed. We, the people, are the government. If we see something wrong in the government we need to fix it. The government is not our enemy. If we strengthen it, it will be our salvation. I read a science fiction book about the future and what it would be like if two multi-national corporations were the government. Those two factions were fighting to become the major one. People were not allowed to read and their house would be burned if a book were found in it.
    Only pockets of the world were fit for habitation. Robots were sent to execute people who might be a danger to the status quo.

    1. howdidisraelget200nukes March 29, 2013

      Our “government” has been taken over. It happened on 11.22.1963.

      1. Independent1 March 30, 2013

        nobsartist, is that you posting as 200nukes these days?? Nobsartist is the only poster I’ve seen who is obsessed by the date that JFK was killed – 11.22.1963.

  3. dtgraham March 29, 2013

    Just preposterous. Their deposits and their returns are guaranteed and they’ve been given immunity. Behemoths have been created that are too big to fail or even jail, and they should be broken up if they can apparently no longer be controlled as they once were.

    The largest banks control a larger share of deposits than they did before. Their asset base is a greater percentage of GDP. They now have an explicit guarantee of being bailed out again and, let’s face it, they won the battle with Tim Geithner over the kind of structural change that Barney Frank and others pushed for.

    They should be forced to raise their capital. Customers should be made to acknowledge that there won’t be any more guarantees if you deposit anything over $250,000.00, for example, or if you’ve bought a credit default swap or any other derivatives from the banks. The banks will then have to pay more for capital and that will force them over time to slim down. Then set absolute numerical limits on the size of the asset base to shield the economy from the downside risk of failure. These things can easily be done and were done for 50 years with no banking crises.

    The problem of course is that there’s no limit on lobbying and big money in the U.S. system. Enough lobbyists can shroud any statute that’s passed and just tie it up such that even the critically important Volker rule still hasn’t been implemented.

  4. turtlewoman1039 March 30, 2013

    Gotta love the republican mantra of ‘personal responsibility’:

    Get caught with pot – prison time
    Launder drug cartel $$ (HSBC) – ‘oops!’ and a pittance of a fine
    Petty theft – jail time
    Steal from investors, tank the economy on a national & global scale – ‘oops!’, too big to jail
    Work full time and barely make ends meet, turn to SNAP – ‘lazy’
    Corporations that make multi-millions in profit, stash $$ out of the country, receive corporate welfare in form of tax breaks, even negative taxes – ‘they deserve more tax leniency’

    If corporations are people, start judging them by the ‘real people’ standards…

    1. Pedro John March 30, 2013

      James5:1-6 . Serving God by helping the poor and helpless.
      Closing tax loop holes is not a tax increase.
      Pres. Obama will not take away your Gun. why do you need an assault weapon in the peace of your home. you will be allowed to have a six shooters, a shotgun and a hunting rifle. IF EVER YOU WANT AN ASSAULT WEAPON , WHY NOT SERVE AND JOIN THE ARMY ,ITS PATRIOTIC.

      1. ralphkr March 31, 2013

        I already did my time over 50 years ago, Pedro John, but I wouldn’t mind having my army 30.06 scoped sniper rifle and M3A1 greasegun (definitely illegal with 30 round magazine & full automatic) back so I could take out a few before they kill me. If the Vikings were correct that would give me even more servants than I already have in the afterlife.

        1. Gary Graves April 1, 2013

          yea doomsday look out!

          1. ralphkr April 1, 2013

            Wasn’t that the Klingon death cry?

  5. Lovefacts March 30, 2013

    the justice department forgotten about the Sherman Antitrust Act? Oh, that’s right, the AG is a gutless wonder who won’t even go after voter supression unless shamed into it. The irony is that compared today’s banks AT&T was still in the minor leagues when it was broken up.

  6. Carlton Higginbotham March 30, 2013

    Instead of penalizing investors, send the responsible execs/perpetrators to prison. This shit would stop immediately.

    1. Madelaine Ayers Henne March 30, 2013

      I say jail time!! Big time!!

      1. dtgraham March 30, 2013

        I like Carlton’s idea too. If some of their execs started visiting the crowbar hotel, I imagine they’d shape up pretty fast. That’s not bad.

    2. Pamby50 March 31, 2013

      And not one of those country club jails!!!!

      1. ralphkr March 31, 2013

        Even the plausible threat of time served in a country club jail would be a viable deterrent to these thugs in three piece suits. Consider that a year incarcerated would equal the equivalent in millions of dollars in lost ill-gotten gains.

    3. David L. Allison March 31, 2013

      The investors choose the company or other investment to support knowing what the companies are doing and likely to do. Punish the corporations, directors and officers alike.

  7. Joyce R March 30, 2013

    I hope Judge Cote is being supported by others and that she has nerves of steel.

  8. howa4x March 30, 2013

    The big banks give the adjective sleaze new meaning. Here they don’t want to own up for wrecking the economy and trying to hid behind a fleet of that other group trying to wreck our country: Lawyers who will deceive for the highest bidder. None of this surprises me anymore. The republicans yip about morality and a lack of values but will stay silent on this. It interesting that they screech about gay marriage as killing our country, but are ok with Banks cheating and lying.

  9. Hut Master March 30, 2013

    The Banks cry baby Attornies should be sent directly to jail. These whimps are crying the same defence the Homeowners are. It is time to STOP abusing the Homeowners and jail the Mills, then Break up and Jail the TBTF Banksters.

  10. disqus_Ut1U34e38K March 30, 2013

    what the banks are afraid of is, if one of the banking systems actually being held responsible for the catastrophe they have created, for they know if one goes they all will go and a complete collapse of our financial system is going to result

  11. Pedro John March 30, 2013

    James5:1-6 . Serving God by helping the poor and helpless.
    Pres. Obama will not take away your Gun. why do you need an assault weapon in the peace of your home. you will be allowed to have a six shooters, a shotgun and a hunting rifle. IF EVER YOU WANT AN ASSAULT WEAPON , WHY NOT SERVE AND JOIN THE ARMY ,ITS PATRIOTIC.

    1. howdidisraelget200nukes April 1, 2013

      Of course he wont. Its right there in his “Affordable Health Care” act ……right where you would expect to find it.

  12. ococoob April 1, 2013

    The nerve of ’em! After WE bailed them out?!


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