Bloomberg News

Dexia Sues Deutsche Bank Over $1 Billion Securities Purchase

July 14, 2011

(Updates with excerpt from complaint in third paragraph.)

July 14 (Bloomberg) -- Dexia SA, the lender to local governments rescued by France and Belgium in 2008, sued Deutsche Bank AG claiming fraud in connection with more than $1 billion in residential mortgage-backed securities.

Germany’s biggest bank played a “ubiquitous role” in the mortgage origination and securitization process while betting against the U.S. housing market as far back as 2005, according to the complaint. By the end of 2007, Deutsche Bank had amassed a $10 billion short position that paid off when the loans backing the securities failed, Brussels-based Dexia said.

“Deutsche Bank originated, purchased, financed and securitized exceptionally high-risk loans into these RMBS, all while internally disparaging the poor quality of these loans and the RMBS they backed as ‘pigs’ and ‘crap,’” Dexia said in the complaint.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Renee Calabro, a spokeswoman for Frankfurt-based Deutsche Bank, said today by e-mail that the company would fight the lawsuit, which she said was “without merit.”

Deutsche Bank knew the quality, origination practices and underwriting guidelines because of its “close relationship” with the lenders that originated the loans, Dexia said in the complaint.

‘Among the Worst’

“As Deutsche Bank knew - but investors like Dexia would only later discover - these originators were among the worst of the subprime mortgage lenders, willing to ‘just give anyone a loan who wants one,’ secure in the knowledge that their Wall Street partners like Deutsche Bank would then foist the loans on unsuspecting investors, like Dexia,” Gerald H. Silk, an attorney with Bernstein Litowitz Berger & Grossmann LLP in New York, said in the complaint.

A Deutsche Bank trader entered into trades “enabling Deutsche Bank to effectively ‘short’ the subprime mortgage market by betting against subprime RMBS such as those it created and sold to investors like Dexia,” according to the complaint.

Dexia said it invested more than $1 billion in Deutsche Bank residential mortgage-backed securities in 32 offerings from 2005 to 2007. Belgium and France led a 6.4 billion-euro ($9.2 billion) bailout of Dexia in September 2008 as the financial crisis forced governments to prop up institutions across Europe.

Countrywide Suit

Dexia was among a dozen institutional investors that sued Bank of America Inc.’s Countrywide unit in New York state Supreme Court in January, claiming they were misled about the quality of the loans in mortgage-backed securities.

Deutsche Bank and its MortgageIT unit were sued by the U.S. in federal court in New York in May and accused of lying to qualify thousands of risky mortgages for a government insurance program.

Deutsche Bank earlier this week asked a judge to dismiss the U.S. complaint, saying that the alleged conduct occurred before it acquired MortgageIT.

Attorneys general from all 50 states and federal agencies are investigating the way banks handle mortgage loans and conduct foreclosures. Deutsche Bank is among lenders being probed by New York Attorney General Eric Schneiderman’s office over mortgage securitization, a person familiar with the matter said on May 24.

The case is Dexia SA/NV v. Deutsche Bank AG, 651918/2011, New York State Supreme Court, New York County (Manhattan).

--With assistance from Aoife White in Brussels. Editors: Andrew Dunn, Stephen Farr.

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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