Banks, Litigation and Mortgages

by John Wilhoit Jr. on

What a mess.  One big mess.  Reports say major banks may have sold more than $200 Billion dollars in fraudulent mortgage securities.  Large banks will be in litigation for years to come from the recent implosion of mortgage-backed securities.  At the end of the day, who wins? 

JP Morgan and Bank of America are on the hit list.  Big targets all.  I’m not taking sides here.  My concern is for the American banking system.  Sub-prime mortgages were never a bad thing.  Packaging sub-prime mortgages and selling them as AAA credit was the terrible thing.  And rating agency have no blame???  Law suits by investors, State Attorney Generals and big brother himself are all getting in on the action.  Goldman Sachs is out of the mortgage-back securities business altogether. 

Question: if banks diverting billions of dollars (with a B) to address litigation, what happens to their ability to lend?  You remember lending, the primary business of  banking?  If this litigation were  a bell curve, we are at the starting gate of the curve at 0.01/0.01. 

No matter the resources of an entity at some point they reach a point of saturation, or exhaustion.  This action, years upon years of litigation, will redirect human and monetary resources of major banks away from their primary business mission- lending.  In other  words: they will have fewer people and fewer dollars to lend to real businesses and real people.

Today, that may not seem like a big deal as demand for loans is below dirt anyway (beyond stuck in the mud).  The credit crisis as noted the day after the Lehman bankruptcy in 2008, showed many a crack in the system; one being that businesses being cut off from access to credit do strange things- like not pay their people.  And the ripple, once started is impossible to retract. 

I believe in capitalism.  I believe in competition.  I also believe generational litigation will directly impact GDP as HUGE amounts of human capital will be deployed to address these potential wrongs.  I just don’t see a winner or one new loan generated from all this.  Sad.

http://www.bloomberg.com/news/2011-09-22/bank-of-america-filing-fee-case-may-open-new-front-in-mortgage-lawsuits.html  

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