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UBS AG (UBS) is seeking to block a U.S. lawsuit over billions of dollars in mortgage bonds in a case that may set back government efforts to recover losses Fannie Mae and Freddie Mac incurred in the housing crash.
UBS argued before the U.S. Court of Appeals in Manhattan today that the court should overturn a ruling allowing the Federal Housing Finance Agency to pursue its suit over losses on $6.4 billion in mortgage bonds sold to the two mortgage-finance companies.
At issue on appeal is whether the 2008 law that established the agency, which regulates Fannie Mae and Freddie Mac, also extended the time the government had to file claims against Zurich-based UBS and a group of other lenders.
“It’s highly politicized,” said Dan Flanigan, chairman of the financial services and real estate practices at the law firm Polsinelli Shughart PC. “There will be huge pressure on all these courts -- not that they’ll be able to acknowledge -- but huge political pressure not to let these banks off the hook.”
The FHFA sued UBS and more than a dozen other banks, including JPMorgan Chase & Co. (JPM), Barclays Plc (BARC) and Goldman Sachs Group Inc. (GS), over mortgage securities sold to Fannie Mae and Freddie Mac. Four years after the financial crisis, banks are still grappling with liability tied to mortgage lending as investors and government authorities pursue claims and negotiate settlements.
Stefanie Johnson, a spokeswoman for the FHFA, declined to comment about the hearing. Megan Stinson, a UBS spokeswoman, didn’t respond to an e-mail seeking comment.
Other lenders that FHFA sued have sided with UBS and asked the appeals court to overturn the lower-court ruling. If not reversed, the ruling allowing the case to proceed against UBS will have “an enormous impact,” exposing them to federal and state securities law claims “long after Congress and the relevant state legislatures determined that such claims should have expired,” the banks said in court papers.
An appeals court decision on the timeliness of the government’s claims will “remove a cloud of uncertainty that hangs over” the other cases against the banks, said U.S. District Judge Denise Cote in Manhattan, who ruled against UBS and said the case could proceed.
FHFA, which placed Fannie Mae and Freddie Mac into conservatorship in 2008, sued UBS in July 2011 and then followed with lawsuits against 17 financial institutions in September 2011.
The agency claims that loans backing securities sold to Fannie Mae and Freddie Mac were riskier than promised, leading to losses. The original amount of securities at issue in the cases is about $200 billion, according to the agency.
UBS, which says FHFA “sat” on its claims, argues the case should be dismissed because the claims expired in 2010 and are time-barred by the so-called statute of repose, according to its court filing.
“This appeal involves a belated attempt by the two largest and most sophisticated issuers and purchasers of MBS in the world to shift blame for losses they suffered as a result of the nationwide housing crisis in which they played a critical role,” the bank said in its brief filed with the appeals court. “Their attempt, however, comes entirely too late.”
The judge rejected the bank’s argument in a decision in May. Cote said the law establishing the FHFA -- the Housing and Economic Recovery Act of 2008 -- gave the agency three years from when it became conservator of Fannie Mae and Freddie Mac to bring its securities law claims.
UBS’s argument is based on a narrow reading of the law that would undermine congressional purpose in passing the legislation, Cote said.
At today’s hearing, Judge Denny Chin asked how the bank’s position could be correct if the “entire point” of the legislation was to put Fannie Mae and Freddie Mac “on solid footing.”
The FHFA argued in court papers that it would be “severely constrained” in recovering money for the companies and ultimately taxpayers if it remained subject to time bars. Barring the FHFA from pursuing claims “would defeat the very purpose” of the 2008 law, it said.
The Securities Industry and Financial Markets Association, a Wall Street lobbying group that has sided with UBS, said Cote made a “policy judgment” in allowing the case to proceed.
“When courts rewrite statutes based on intuitions as to what Congress would have preferred to have said, uncertainty and arbitrary decisions result,” the group said in a filing with the appeals court.
Flanigan, who isn’t involved in the cases, said he expects the matter to be appealed to the U.S. Supreme Court.
“The statute is ambiguous and both sides are able to point to some persuasive authority for their position,” he said.
The appeals court case is Federal Housing Finance Agency v. UBS Americas Inc., 12-3207, U.S. Court of Appeals for the Second Circuit (Manhattan). The district court case is Federal Housing Finance Agency v. UBS Americas Inc., 11-05201, U.S. District Court, Southern District of New York (Manhattan).
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