One of the most frustrating things about the 2008 financial crisis was the sense that the people who got us into this mess weren’t going to face any kind of repercussions. For ordinary Americans watching their nest eggs tank while reading about bailouts and golden parachutes, there was a widespread feeling that somebody needed to be held accountable. Now, David’s winding up his slingshot.
The National Credit Union Administration — it basically does for credit unions what the FDIC does for banks — filed a lawsuit against J.P. Morgan Chase & Co., and Royal Bank of Scotland PLC in a bid to claim $800 million in compensation. The suits allege that the respective banks took terrible mortgages, bundled them into securities and then sold them to five credit unions, omitting pertinent information or flat-out lying about the poor quality of the underlying assets. When the credit unions failed, NCUA had to take custody of these bonds and pay hundreds of millions of dollars to make the credit unions’ customers whole.
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The agency has indicated that this is only the first in a string of lawsuits it intends to bring against financial firms that sold what was essentially fool’s gold to credit unions that then collapsed as a result. “We expect to file additional actions and seek a total amount of damages in the billions of dollars. Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions,” NCUA’s board chairman said in a statement.
In the past, banks have defended themselves against these types of accusations by saying things like: “These investors had access to highly detailed information that allowed them to conduct their own independent research and analysis,” as Goldman Sachs said in a statement. In other words, if we can sneak the damning fine print past you, go us! (Goldman, for its part, was responding to accusations that it not only sold junk securities but also arranged to profit from their inevitable failure.)
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The NCUA suits dispute the theory that credit union execs were just too dumb to notice the products they were buying were real stinkers. Rather, the agency charges, the banks deliberately obscured the knowledge that these securities were time bombs just waiting to blow up in the institutions’ faces. Will the agency succeed? It’s way too early to tell, but some of the emails and records of conversation between Goldman employees are pretty telling, with bankers admitting to colleagues that the stuff they were selling was likely to crash and burn. If the NCUA uncovers a similar level of Machiavellian honesty, especially at the upper echelon, at J.P. Morgan and RBS, they might just nail Goliath in the forehead.