The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.
Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.
City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.
"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."
A city spokeswoman said the companies, which are based across the country, were not given advance notice of the suit, which was submitted late Thursday and assigned to Judge Peter Corrigan.
Cleveland is the second major U.S. city this week to sue over the ills of subprime loans.
On Tuesday, Baltimore sued Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites - a violation of federal law.
The Baltimore and Cleveland efforts are believed to be the first attempts by large cities to recover losses blamed on the foreclosure epidemic, which has particularly plagued Ohio.
But Cleveland's suit is even more unique because the city has based its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore's in that it targets the investment banking side of the industry, which feeds off the mortgage market.
Investment bankers at these companies buy subprime mortgages from lenders, then sell mortgage-backed securities to investors. It is a legal practice, known as securitization, that became increasingly popular during the housing boom earlier this decade.
Jackson and city Law Director Robert Triozzi said Cleveland should have been excluded from the frenzy. They pointed to housing prices that remained relatively flat as real estate values jumped elsewhere, as well as a manufacturing downturn and widespread poverty.
The suit claims that even though these issues were well documented, investment bankers continued to feed loans to hungry investors at the expense of borrowers buried in interest.
"Ultimately, they're responsible," Triozzi said of the investment banks. "They knew the economic conditions in which they were operating here. They decided that didn't matter."
Joshua Cohen, a partner with Cohen Rosenthal & Kramer LLP, will lead a team of outside lawyers assisting the city.
Cohen is perhaps known best for representing Cleveland Browns season ticketholders in a class-action lawsuit that brought a $3 million settlement after Art Modell moved the football team to Baltimore. His Cleveland law firm has five attorneys, setting the stage for a David-versus-Goliath court battle.
"There is no doubt, in terms of the resources, there is going to be somewhat of a disparity - a big disparity," Cohen said. "We're confident in our theory and what we have alleged. We knew exactly what we were taking on."
Maureen Harper, a spokeswoman for the mayor, said the city won't pay outside attorney fees unless a settlement or favorable verdict is reached.
Triozzi acknowledged the lawsuit, with its unique nature and 21 large defendants, could move slowly. He also expects the banks will request the case be moved to federal court.
"I understand fully what we are up against here," the law director said. "We would not be doing this if we did not believe we had a sound legal argument to stand on."
Jackson, asked if long litigation would be worth the city's time and money, replied: "We're in this for the long haul. I trust Director Triozzi will tell me when to hold them or fold them."
Judge Corrigan will have to decide "how far up the food chain" to go in determining responsibility, said Cleveland State University Law professor Kathleen Engel, an expert on mortgage-backed securities. She believes the city can make a case against the investment bankers.
"These loans were defective products," said Engel, co-author of "Turning a Blind Eye: Wall Street Finance of Predatory Lending," an article that appeared last year in the Fordham Law Review. "They were continuing to finance products that they knew were defective and could have devastating consequences for the city of Cleveland."
The suit accuses some companies without pinning them specifically to Cleveland loans. Engel said making the link will be easy because most, if not all, investment banks had some stake in the market.
The suit may draw the interest of national law firms willing to help Cohen, Engel said.
Ohio Attorney General Marc[hgo: cq: ] Dann also is considering a state lawsuit against investment banks. Dann said he is investigating "some of the very same people" identified in the city's suit.
Dann said a state filing is months away and probably wouldn't be submitted as a public-nuisance case. But he commended Jackson and Triozzi's "creative" approach.
"There's clearly been a wrong done, and the source is Wall Street," Dann said in a phone interview. "I'm glad to have some company on my hunt."
-Henry Gomez and Thomas Ott of the Plain Dealer 1/11/08