ALEXANDRIA, Va. – NCUA said this morning it disagrees with yesterday’s tentative ruling by a federal judge dismissing its suit against RBS Securities in the failure of WesCorp FCU, a ruling that could jeopardize similar suits against JP Morgan Chase, Goldman Sachs and Wells Fargo for the sale of risky mortgage backed securities to five failed corporate credit unions.
Other entities, including several Federal Home Loan Banks and Fannie Mae and Freddie Mac have made similar allegations in civil suits filed against various Wall Street underwriters of MBS.
"We are disappointed with Judge Wu's tentative ruling,” an NCUA spokesman told the Credit Union Journal this morning. “As we indicated during yesterday's hearing we believe he is imposing a heightened pleading standard not required by the law. Our allegations are quite specific and the vast majority of District Courts have upheld far less specific allegations in cases like this one."
Judge George Wu, the same federal judge presiding over NCUA's civil negligence suit against top WesCorp executives, issued a ruling from the bench indicating he plans to dismiss the NCUA claims against RBS for the sale of about $1.1 billion of MBS that went sour soon after their sale to WesCorp.
Judge Wu, said he is not convinced that RBS intentionally packed the MBS with subprime loans that did not meet its underwriting standards simply by a litany of statistics submitted by NCUA showing the high rate of failure for the securities.
The suit is filed in U.S. District Court for the Central District of California, which has jurisdiction over WesCorp, based in nearby San Dimas.
Other Wall Street banks have pointed to Judge Wu’s preliminary ruling issued in December in their own defense against NCUA’s claims.
Last week, JP Morgan pointed to Judge Wu’s December ruling in asking a federal court in Kansas to dismiss NCUA’s suit against it for the sale of MBS to U.S. Central FCU, Members United Corporate FCU and Southwest Corporate FCU, as well as WesCorp. That suit is filed in U.S. District Court for the District of Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central.
NCUA claims the sellers and underwriters of the WesCorp MBS made numerous material misrepresentations to WesCorp in the offering documents for the securities that went bad just months after their sale. These misrepresentations caused WesCorp to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial, according to NCUA. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering WesCorp insolvent. NCUA estimates the WesCorp failure will cost $7 billion, which will be accrue to all federally insured credit unions in the form of a corporate bailout assessment.
