Bank of America Down 20% Today After Being Sued by AIG for “Massive Fraud” … Goldman, JP Morgan and Deutsche Are Next

Bank of America Down 20% … Committed “Massive Fraud”

B of A is down 20% after AIG sued the bank for “massive fraud” in connection with mortgage debt, seeking $10 billion dollars.

As Reuters notes:

AIG accused Bank of America and its Countrywide and Merrill Lynch units of misrepresenting the quality of mortgage-backed securities, including more than $28 billion it bought, and lying to credit rating agencies about the underlying loans.

According to its complaint, AIG examined 262,322 mortgages that backed 349 offerings it bought between 2005 and 2007. It said the quality of 40.2 percent of the mortgages was significantly inferior to what had been represented.

“Defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made,” said the complaint, filed on Monday in the New York State Supreme Court in Manhattan.

(The bank is down 50% for the month).

Bloomberg notes:

Credit-default swaps on Bank of America Corp., the nation’s biggest bank by assets, soared to the highest since May 2009.

Goldman Sachs, JPMorgan Chase and Deutsche Bank To Be Sued By AIG

Moreover, AIG intends to sue a number of other large banks for fraud as well. As the New York Times reports:

A.I.G. is preparing similar suits against other large financial institutions including Goldman Sachs, JPMorgan Chase and Deutsche Bank, said the people with knowledge of the complaint, as part of a litigation strategy aimed at recovering some of the billions in losses the insurer sustained during the financial crisis.

The Problem: Failure to Prosecute Fraud

As I’ve repeatedly noted, both the Great Depression and the current financial crisis were largely caused by fraud, and the economy cannot stabilize until fraud is prosecuted.

The failure of government to prosecute Wall Street fraud is the main reason that we’re experiencing chaos in the markets again.

Unfortunately, the leaders of both parties have made it official policy not to prosecute fraud (and see this).

Bailing Out the Big Banks Just Made Things Worse

Bailing out the giant banks which committed massive fraud hurt – rather than helped – the economy.

As I wrote last month: If We Don’t Break Up the Giant Banks NOW, They’ll Be Bailed Out Again and Again … Dragging the World Economy Down With Them.

This is not the view of some obscure blogger. Virtually all of the independent economists and financial experts (not working for the Fed, Treasury, or big banks) agree …

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