WALL STREET-In the first two of what promises to be several legal actions seeking compensation for the corporate credit union crisis, NCUA sued two of the biggest Wall Street banks last week seeking to recover losses from the now-toxic mortgage-backed securities they sold to four of the five failed corporates.
NCUA charges that JP Morgan Securities and RBS Securities, a unit of Royal Bank of Scotland, sold almost $1-billion of MBS to the four corporates-U.S. Central FCU, WesCorp FCU, Members United Corporate FCU and Southwest Corporate FCU-that were stuffed with subprime loans that were passed off as Triple A-rated. The suits were filed in U.S. District in Kansas City, which has jurisdiction over Lenexa, Kan.-based U.S. Central, the one-time $52-billion corporate.
"NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions," said NCUA Chairman Debbie Matz, referring also to the failure of Constitution Corporate FCU.
'We Intend To Hold Responsible Parties Accountable'
"NCUA's legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions," Matz conotinued, "By these actions we intend to hold responsible parties accountable. In seeking recompense for the meltdown of the corporates NCUA has sued the top executives and directors of WesCorp and indicated it will file bond claims against directors and officers of U.S. Central, but has been slow to act otherwise, with no recoveries yet. That appears to be ready to change as NCUA indicated it has issued 963 subpoenas to people involved in the sale of the estimated $50-billion in toxic MBS owned by the five corporates and is preparing to sue several other parties. Among the targets are believed to be Goldman Sachs and Bank of America, which now owns Countrywide, the biggest seller of MBS to WesCorp, as well as the Wall Street rating agencies. NCUA declined to comment on potential targets.
Representatives of JP Morgan and RBS did not return phone calls seeking comment last week.
One foe NCUA is likely to run up against is the statute of limitations on some of its claims. NCUA said its suits against JP Morgan Chase and RBS Securities should be considered by the federal court as within the statute of limitations, even though some of the sales took place as long as five years ago.
Under the Federal CU Act, NCUA, as conservator of U.S. Central FCU and WesCorp FCU, which purchased billions of dollars in toxic MBS from the two firms, has a year "after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence," NCUA said in its separate suits. NCUA took the two corporate giants under conservatorship in March 2009, but has been working since then to determine the quality of the MBS purchased by the two corporate failures.
That means that NCUA should not be barred by any statute of limitations from suing the Wall Street firms, even though some of the MBS were purchased in 2006.
Meantime, the two suits show the nature of the subprime mortgages that were packaged into MBS by the Wall Street firms and sold to buyers like U.S. Central and WesCorp. The two suits show that the securities bought by U.S. Central and WesCorp, as well as Members United Corporate FCU and Southwest Corporate FCU, were created with loans originated by some of the most notorious subprime lenders, some of which eventually went bust, like IndiMac, Ameriquest, American Home, Fremont Home Loans, New Century, Option One, Washington Mutual, Wachovia, NovaStar and Countrywide Mortgage.
Underwriting Standards 'Ignored'
In its suits, NCUA alleges that JP Morgan and RBS ignored their own underwriting standards in accepting mortgages for securitization. Prospectuses offered by the two were erroneous, according to NCUA, because the "originators did not adhere to the stated underwriting guidelines, did not effectively evaluate the borrowers' ability or likelihood to repay the loans, did not properly evaluate whether the borrower's debt-to-income ratio supported a conclusion that the borrower had the means to meet his/her monthly obligations, and did not ensure that adequate compensating factors justified the granting of exceptions to guidelines."
The originators, claims NCUA, "systematically disregarded the stated underwriting guidelines in order to increase the volume of mortgages originated."
Virtually all of the MBS that turned out to be toxic were rated Triple A when they were bought by the corporates, according to the suits. NCUA is seeking $565 million in damages from RBS and $278 million from JP Morgan.
Still Struggling With Costs
The suits come as NCUA is still struggling with the costs of the corporate crisis necessitated by the failure of the five corporates (including Constitution Corporate FCU). NCUA says it has not updated its loss estimates for the bailout and insisted last week the projected cost of the corporate bailout is still $7 billion to $9 billion.
"I would say that's rather optimistic," said Charles Felker, a former NCUA corporate examiner and now vice president and credit union bond house First Empire Securities, who put the tab much higher, $20 billion to $25 billion.
The recent completion of its guaranteed notes offering to finance the program offers a guidepost. NCUA said it sold $28 billion worth of NCUA Guaranteed Notes securitized by $40 billion in MBS held by the five corporates, which suggest losses of $22 billion on the program Earlier, NCUA sold $10 billion worth of MBS owned by U.S. Central and WesCorp at a steep loss (the agency has declined to reveal the actual amount).
Credit unions have already paid almost $8.7 billion, first by the elimination of $5.6 billion of their capital in the five corporates, plus another $1 billion of capital in all the other corporates, then by more than $1.1 billion in corporate assessments the past two years.
The JP Morgan and RBS suits also give a good indication, both claiming that half of the mortgages included in the MBS have gone bad, which suggests that the $40 billion of MBS securities under NCUA's notes program could end up with a loss of $20 billion.
