Bloomberg News

BofA, JPMorgan Among 17 Banks Sued by U.S. for $196 Billion

September 03, 2011

(Updates with statement from Royal Bank of Scotland in 19th paragraph.)

Sept. 3 (Bloomberg) -- Bank of America Corp. and JPMorgan Chase & Co. were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.

“The loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities,” the FHFA said in a statement.

FHFA is seeking to rescind the transactions plus other damages, including civil penalties and punitive damages in cases alleging misconduct.

In addition to JPMorgan and Bank of America, the agency filed complaints in federal court in Manhattan yesterday against Citigroup Inc., Goldman Sachs Group Inc., Merrill Lynch & Co., Barclays Plc, Nomura Holdings Ltd., HSBC Holdings Plc, Societe Generale SA, Credit Suisse Group AG, Deutsche Bank AG and First Horizon National Corp.

The FHFA sued Ally Financial Inc., Countrywide Financial Corp., General Electric Co. and Morgan Stanley in state court in Manhattan, according to the agency. It sued Royal Bank of Scotland Group Plc in federal court in Connecticut.

Fannie and Freddie

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

The FHFA said in its filings that Fannie Mae and Freddie Mac bought $6 billion in mortgage-backed securities from Bank of America; $24.8 billion from Merrill Lynch, which Bank of America took over in 2008, and $26.6 billion from Countrywide, which Bank of America acquired the same year.

The FHFA claims Fannie Mae and Freddie Mac bought $33 billion in securities from JPMorgan and $30.4 billion from Royal Bank of Scotland. According to the complaints, Fannie Mae and Freddie Mac also bought $14.2 billion from Deutsche Bank, $14.1 billion from Credit Suisse, $11.1 billion from Goldman Sachs, $10.6 billion from Morgan Stanley, $6.2 billion from HSBC, $6 billion from Ally, $4.9 billion from Barclays, $3.5 billion from Citigroup, $2 billion from Nomura, $1.3 billion from Societe Generale, $883 million from First Horizon and $549 million from GE.

UBS Suit

The FHFA sued UBS AG, Switzerland’s biggest bank, in July over $4.5 billion in residential mortgage-backed securities sold to Fannie Mae and Freddie Mac, claiming the bank misstated the risks of the investments.

“The claims brought by the FHFA are unfounded,” said Frank Kelly, a spokesman for Frankfurt-based Deutsche Bank. “Fannie Mae and Freddie Mac are the epitome of a sophisticated investor.”

Ally, based in Detroit, said in a statement that it believes FHFA’s claims are meritless and the company intends to defend its position.

Fannie Mae and Freddie Mac “acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors,” said Larry DiRita, a spokesman for Charlotte, North Carolina-based Bank of America.

Kim Cherry of Memphis, Tennessee-based First Horizon said the company would defend itself.

Knew the Risks

The firms claimed to understand the risks, and continued buying, even after their regulator said they lacked adequate risk-management capabilities to do so, DiRita said.

Company representatives who declined to comment on the suits yesterday included Danielle Romero-Apsilos of New York- based Citigroup, Kerrie Cohen of London-based Barclays, Kristin Lemkau of JPMorgan in New York and Russell Wilkerson of Fairfield, Connecticut-based GE.

Mark Lake of New York-based Morgan Stanley, Jonathan Hodgkinson of Tokyo-based Nomura, Michael DuVally, of Goldman Sachs in New York, Steven Vames, of Zurich-based Credit Suisse, Neil Brazil of London-based HSBC, and Jim Galvin of Paris-based Societe Generale, also declined to comment.

Edinburgh-based Royal Bank of Scotland Plc will defend the claims. “We believe we have substantial and credible legal and factual defences to these claims and will defend them vigorously,” the bank said in an e-mailed statement.

Some of the complaints described mortgages that were already performing worse than investors were told at the time securitizations were sold. Disclosures by some firms overstated home values or misrepresented the number of homes occupied by borrowers, according to the FHFA.

‘Under Water’

An instrument underwritten by an affiliate of Merrill Lynch was reported to have no loans larger than the value of the house, known as the loan-to-value ratio. In reality, about 20.7 percent of the mortgages had an LTV ratio above 100 percent, meaning they were already under-secured or “under water” from the start, according to the FHFA’s complaint. Some pools packaged by GE or its affiliates were said to have no loans with an LTV over 100 percent, when about 13 percent did, according to another suit.

In the complaint against Goldman Sachs, the FHFA claimed the bank securitized many mortgages that failed to meet underwriting standards even after outside firms it hired reported “high percentages of defective or at least questionable loans.”

“Goldman simply ignored and did not disclose the red flags,” the FHFA claimed.

The cases are Federal Housing Finance Agency v. Bank of America Corp., 11-CV-6195; FHFA v. Barclays Bank Plc., 11-CV- 6190; FHFA v. Citigroup, 11-CV-6196; FHFA v. Credit Suisse Holdings (USA) Inc., 11-CV-6200; FHFA v. Deutsche Bank AG, 11- CV-6192; FHFA v. First Horizon National Corp., 11-CV-6193; FHFA v. Goldman, Sachs & Co., 11-CV-6198; FHFA v. HSBC North America Holdings Inc., 11-CV-6189; FHFA v. JPMorgan Chase & Co., 11-CV- 6188; FHFA v. Merrill Lynch & Co., 11-CV-6202; FHFA v. Nomura Holding America Inc., 11-CV-6201; FHFA v. SG Americas Inc., 11- CV-6203, U.S. District Court, Southern District of New York (Manhattan).

Also: FHFA v. Ally Financial Inc.; FHFA v. Countrywide Financial Corp.; FHFA v. General Electric Co.; FHFA v. Morgan Stanley, New York State Supreme Court, New York County (Manhattan).

And: FHFA v. Royal Bank of Scotland, 11-CV-1383, U.S. District Court, District of Connecticut (New Haven).

--With assistance from David Scheer, Michael Moore, Donal Griffin, Laura Marcinek, James Sterngold and David McLaughlin in New York and Dakin Campbell in San Francisco. Editors: Andrew Dunn, Fred Strasser

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net

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


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