Tuesday, January 22, 2008

The Aftershocks

So what are your takeaways from the US mortgage crisis? When things go awry, you can’t do much more than endless finger pointing. If you are a banker, make sure you multi-layer your debt instrument so much and make it as complex as possible so that you always will have someone else to blame.

Lehman Brothers is suing at least six mortgage lenders and brokers, claiming they sold Lehman dubious loans. It claims that borrowers’ incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman’s demand that they buy back defaulted or otherwise problematic loans.

Meanwhile members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell. Lehman denied the accusations.

Bringing securities fraud cases has been made harder by recent Supreme Court decisions that favored Wall Street, companies and professionals like accountants. The court ruled earlier this month that two technology vendors could not be held liable for taking part in a scheme designed by a cable company to inflate its revenue. Last summer, in a ruling favoring the company, Tellabs Inc., the court said that securities cases could be dismissed if investors did not show “cogent and compelling” evidence of intent to defraud. Period.

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