The phrase “too big to fail” has become an important part of the American lexicon over the last few years as investors try to recover from yet another man-made financial disaster. 

The common understanding of the phrase is this: that to allow any bank designated “too big to fail” to fall asunder would be a financial disaster of such epic proportions that the government must step in to keep such an event from occurring. 

That’s one way to look at it. 

Here’s another way: The financial institutions in question grew to such epic proportions that no one ever thought they could falter. They were “too big to fail.” Like most human catastrophes, hubris was at the center of the latest financial turmoil. 

Not to sound too Old Testament here, but the time of reckoning is at hand. Case in point: late last month, a federal judge in New York ruled that a securities fraud case against one of the principal beneficiaries of the government bailouts – American International Group Inc. – may proceed. 

According to Reuters, the case In re: American International Group Inc 2008 Securities Litigation, alleges that AIG misled investors about its exposure to subprime mortgages. The plaintiffs in the case are a group of investors led by the State of Michigan Retirement Systems, a public pension fund. 

The judge in the case – U.S. District Judge Laura Taylor Swain – made the right call. According to Reuters, Swain said the plaintiffs made sufficient arguments claiming AIG “materially misled the market” in hiding its “expansive” underwriting of securities related to subprime mortgages. 

Here at Hagens Berman, we’re working on two cases related to the subprime mortgage mess: Jerry Smit v. Charles Schwab & Co. and First Star Bank v. The Wells Fargo Mortgage Backed Securities AR15 Trust. 

The first suit accuses Charles Schwab & Co. of causing the fund to deviate from its fundamental business objective to track the Lehman Brothers U.S. Aggregate Bond Index. The plaintiffs contend that the fund deviated from its stated investment objective by investing a material percentage of its portfolio in high-risk, non-agency collateralized mortgage obligations, or CMOs, which were not part of the Lehman Bros. U.S. Aggregate Bond Index, according to the complaint.

The second suit alleges that the Wells Fargo AR15 Trust’s registration statement, prospectus and prospectus supplement contained materially false and misleading statements regarding the underwriting standards and loan origination processes used in procuring the loans used to secure the bonds. 

It seems every decade or so, the courts (and regulators) have to step in to yank back the reins on corporate greed. In the late 1980s, the savings and loan scandal prompted federal action. In the early 2000s, the dot-com boom and bust and the accompanying telecom depression yielded new laws such as Sarbanes-Oxley and countless lawsuits against companies and executives that had defrauded shareholders. 

Now, once again, shareholder losses in companies like AIG, Washington Mutual and the assortment of other failed financial institutions have reached an unprecedented scale. The only way to decrease the chances of such titanic failures from happening again is to hold these institutions accountable for the tumult they’ve unleashed upon investors. 

As everyone now knows – no bank, no insurer, no mortgage company is too big to fail.