Wall Street–At Last–Ponies Up

Wall Street is finally paying—in big heaps of cash—for its sins of the mortgage-backed securities debacle.

Bank of America last week said it would pony up $8.5 billion to settle legal claims by institutional investors who took a bath after buying mortgage backed securities created by Countrywide Financial, the subprime home lender Bank of America bought in 2008. According to several news reports, the deal could spur suits by other investors who bought mortgage-backed securities filled with toxic loans from other banks, including Wells Fargo & Co. and JP Morgan Chase &Co.

It could be a long hot summer for Wall Street and its pampered, see-no-evil executives. In fact, independent bank analyst Chris Whalen believes that Wall Street banks face $200 billion in damages stemming from claims of fraud, according to The Deal.

The Bank of America settlement provides some relief to institutional investors. And now, a recent New York State Supreme Court justice’s ruling states that a group of banks, including, you guessed it, Bank of America, should have their actions examined in an $8 million investment scheme that involves 21 families on Long Island. (Full disclosure: Zamansky & Associates is representing those families in New York State Court.)

The fraud stems from the actions of a purported financial planner, Peter Dawson, who is doing 5 to 15 years in prison. He convinced his clients, who had paid off the total amount or lion’s share of their mortgages, to take out new home loans and give him the money to invest. Dawson promised to pay off those new loans with the money he made from the investments, as well as provide a healthy return. Instead, he stole the money and now the victims cannot pay the new mortgage.

We contend that the loans the banks made were full of warning signs and obviously improper. We also contend that the banks placed their own interests above the customers.

The New York Supreme Court Justice F. Dana Winslow recently rejected the notion that banks are blameless in the Dawson theft, as the New York Times reported on Sunday. “Significantly, the courts have held that banks do owe duties of care to their own customers,” Judge Winslow wrote. “Moreover, there is a public interest in ensuring the alleged duties relied upon are ‘performed with reasonable care’—as evidenced by the recent flurry of consumer-oriented laws and amendments enacted in the wake of the ‘subprime mortgage meltdown.’”

As the Times noted, Justice Winslow’s decision is important in that it takes a different tack than the overly narrow approach taken by the U.S. Supreme Court recently on the issue of third-party liability.

It’s time the banks pay for their sins of the mortgage debacle to all investors, not just large institutions.

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