When Fannie Mae and Freddie Mac went belly-up, requiring a massive taxpayer-funded bailout, the outrage was intense. Critics demanded someone be put in jail. The mismanagement in many cases was shocking.

But when looking strictly at the GSEs push into non-traditional, much riskier loans, the issues are less cut and dried. Congress prodded the GSEs in this area, and many applauded the move as a way to expand the ranks of home ownership. The securities that were backed by these loans were for the most part AAA rated (shocking in hindsight).

For backing subprime ARM and Alt-A type loan options--the so-called private label market---the GSEs are blaming big Wall Street banks, the likes of at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others. The Federal Housing Finance Agency, which oversees the conservatorship of Fannie and Freddie, has told the New York Times that it intends to sue these banks for misrepresenting the soundness of securities backed by these mortgages.

We've certainly heard this claim before. The twist here is that the agency will sue not for putbacks, but to be made whole on losses. This adds to a mounting list of possible litigation and potential payouts. One has to wonder at this point how much can the banks take. They face a daunting recovery. The recent travails of Bank of America show just how hard it can be to instill confidence among investors.

For more:
- here's the article

Related articles:
Role of Fannie Mae and Freddie Mac to survive, but how?  
Government ponders refinancing incentives  
Private-label vs. GSE putback risk