Wall Street Subprime Lawsuits AWOL

“Living at risk is jumping off a cliff and building your wings on the way down.”

—Ray Bradbury

The recent collapse at Bear Stearns brought on a couple of lawsuits filed by stockholders and by members of the firm’s stock ownership plan. Observers note that the suits may be the harbingers of what could be a flood of litigation against Wall Street investment firms over the subprime mortgage mess.

So far most of the suits filed over the credit mess have been brought by homeowners against lenders and the question that has many financial gurus scratching their heads is why there hasn’t been a spate of lawsuits against Wall Street firms before now. Answers range from investor ignorance to hazy legal arguments.

One reason, according to some financial legal experts, is that most investors don’t know exactly how much damage the subprime crisis has done to their portfolio. Many of the financial instruments involved, such as collateralized debt obligations (CDOs), are so complicated that putting a number on losses is difficult. It may also be hard to pin any claims of malfeasance against investment firms, since they could argue that they were guilty only of bad judgment—results aren’t guaranteed. They could also maintain that they didn’t originate the bad loans but only put together the securities that were backed by the loans.

$285 billion—Anticipated losses in subprime mortgage collapse.(Bloomberg, 2008)