Underlying the FHFA's massive grouping of lawsuits, seeking to recover in total $196 billion, is an element of fraud that was committed by 17 of the world's largest financial institutions.  The FHFA accuses each of selling securities backed by risky subprime home mortgages over 4 years to Fannie Mae and Freddie Mac without adequately disclosing the risks. 

What is there about the Goldman Sachs lawsuit that sets it apart from the others.  In its filing, the Federal Housing Finance Agency claims that Goldman directly committed common law fraud, and particularly that Goldman "aided and abetted fraud."  The big deal, here, is that the FHFA is the second government agency to level such serious accusations against Goldman;  the first being the SEC.  Being at the center of the lawsuit has to be uncomfortable for Goldman, which has seen its share price drop more than 30% in the past 6 months under an avalanche of bad press.

All told, the FHFA seeks to recover from Goldman damages sustained as a result of Goldman's wrongdoing, including the $11bn that Fannie Mae and Freddie Mac paid the firm for the securities plus interest, the lost value of those securities, and legal fees.   

Main Reasons For Charges Against Goldman.  According to Business Insider, tThere are two main reasons why the FHFA claims Goldman's actions were fraudulent: (i) the money it paid to get into the mortgage origination process;  and, (ii) Dan Sparks.

   (i) Mortgage Originators.  A key sentence in the FHFA lawsuit speaks volumes:

Because the information that Goldman provided or caused to be provided [to ratings agencies] was false, the ratings were inflated... [and] also that Goldman Sachs knew, or was reckless in not knowing, that it was falsely representing the underlying process and riskiness of the mortgage loans... because Goldman’s longstanding relationships with the problematic originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines... [and because] as a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement.

The big thing here is that Goldman funded mortgage originators, who encouraged property appraisers to inflate home values by firing them if they didn't and gave half million dollar loans to people like hairdressers and gardeners.

    (ii) Sparks Flying.  A second reason is that some of its employees signed the "shelf registration documents" registering the securities for multiple issuance with the SEC.  The FHFA alleges that those employees made false statements and omitted facts such as:

• A number of the properties were stated as "owner-occupied" when in fact they were second homes or investment properties. (The FHFA says this is material because a borrower who lives in a mortgaged property is less likely to stop paying their mortgage and thus a better investment.)

• The mortgage loans' Loan-To-Value (LTV) ratios, key numbers in determining the risk of a mortgage loan, were said in Prospectus Supplements to have ratios of 80% or less (meaning that the borrower got a loan for less than their house is worth -- a much more attractive investment than a borrower who took out a loan for more than their house is worth) when in fact many were higher because the appraised values given to the homes were significantly higher than the actual value of the homes.

And those documents, which were key in determining the value of the securities sold to Fannie and Freddie, are alleged to have been manufactured fraudulently by Goldman and its employees.  Dan Sparks is attacked, first and foremost in the suit, because he is blamed with fostering the culture of fraud within the firm's mortgage securities business.

For further details, go to: [business insider, 9/5/11]