A recent piece of litigation (an investigation actually, but it would likely have ripened into litigation) that settled last week seems to me to be indicative of what suits may come.
A the settlement agreement entered into by Goldman Sachs (not to be confused with "Goldman Sex") and the Attorney General of Massachusetts was announced on May 11, 2009 by the AG's office. That agreement requires Goldman Sachs to pay $60 million to (as BankThink's Emily Flitter puts it) "halt the state AG’s investigation in to whether it engaged in deceptive practices while securitizing subprime mortgages." Goldman didn't admit wrongdoing, as is customary in such settlements, but just coincidentally agreed to modify subprime loans that it owns to Massachusetts residences, including agreeing to write of chunks of the principal owed. I don't think that you'd agree to do that unless you thought you had some exposure. The loans in question were securitized by Goldman Sachs and the AG was investigating whether Goldman Sachs had engaged in deceptive practices.
As Ms. Flitter noted, there are only 714 affected Massachusetts borrowers, and the cost of modifications is "relatively" small ($50 million as the cost of the modifications and a $10 million payment to the Commonwealth of Massachusetts). She and others cited in the post also correctly observe that the "monkey see-monkey do" attitude of other state attorneys general could up the ante considerably, not only for Goldman Sachs, but for other securitizers, as well.
“Once this kind of thing becomes popular, you’re going to get a number of attorney generals that are going to jump on the bandwagon and bring some suits,” said Ron Glancz, a partner at Venable LLP. “It’s a way for the attorneys general to reach the investment bankers and the folks that do the securitizing of these assets. It seems in this case they’ve also reached the servicer, because Goldman is a servicer of some of these mortgages.”
Glancz said the lawsuits could prove an expensive prospect for the investment banks, and the future cost of securitizing assets would likely increase.
“This really raises some issues now as to what’s the due diligence that a bank has to do on its own loan portfolio,” Glancz said.
“I would call this decision sort of precedent setting…It will make the investment community sort of leery about what they securitize. From the consumer standpoint they’re going to say this is absolutely right. But if you’re going to look at it as an investment banker it creates an additional expense.”
Glancz said the long-term effects could be mixed. “I don’t know where it’s going to dry up the securitization market,” he said. “In the long run, is this good for the securitization market or is it bad? I don’t know.”
You have to admire a lawyer who publicly admits that he doesn't know something. That runs against the grain of a profession filled with people who think that because they know a lot about a narrow subject, they know a lot about everything. Like the arrogant jerk who writes this blog, for example.
I think that Ron's right on the money that this could be the start of a trend. If it worked once, why not try it 49 more times and see how much blood you can squeeze out of the same turnip, and out of all those other turnips left planted in the soil of Wall Street? As to the long-term effects on the securitization markets, I think that those markets are so hosed, and that the likelihood of a market for securitized subprime loans developing in my lifetime so remote, that I doubt that we'll see much of an effect on that market due primarily to AG's going after securitizers or servicers. If it causes banks to have to perform more dur diligence on loans that are securitized, I doubt that many will bemoan people the additional cost. Among many problems with subprime and other not-ready-for-prime-time loan types that were securitized in the last decade, a lack of due diligence by securitizers (and the rating agencies that were in bed with them) was one right up near the top of the heap of causes of the mess we're now trying to dig our way out of. The pendulum may swing back too far to the conservative side for awhile, but we could stand a little of that swinging.
