WICHITA, Kan. Wall Street’s leading lobby group told a federal appeals court Friday that numerous claims brought by NCUA against underwriters of failed securities sold to corporate credit unions some of them filed as many as seven years after the sale could have broad ramifications for the securities industry as a whole and should be rejected.
In a brief filed with the appellate court, the Securities Industry and Financial Markets Association said most of the NCUA claims should be denied because they came long after the expiration of the statutes of repose, the nominal three-year window after which civil suits usually are barred.
“This case has far-reaching significance not only for SIFMA’s members but also for the securities industry as a whole,” said the group, noting that NCUA, the FDIC and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, have more than 20 suits pending concerning more than $200 billion of securities.
The U.S. Court of Appeals for the Tenth District is reviewing whether a pending claim NCUA has filed against RBS Securities was filed within the proper statutes of repose and whether NCUA, as a government agency, should be allowed to extend the statutes of repose and limitation. The lower court last year ruled that existing statutes, including the 1989 S&L bailout law, allow federal agencies, such as NCUA, to extend statutes of repose once they take over an entity, as NCUA did the five corporates in 2009 and 2010. NCUA claims the statutes or repose did not start running until the federal agency took over the failed corporates, thereby extending the timeline.
NCUA has filed 10 separate suits against the biggest Wall Street banks, including JP Morgan Chase, Goldman Sachs, UBS Securities, Barclay’s Capital and Credit Suisse Securities, claiming the banks violated their own underwriting standards when they packaged subprime loans from a variety of lenders into mortgage-backed securities that went sour soon after they were sold to five corporate credit unions, resulting in billions of dollars in losses. NCUA eventually liquidated the five, U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU, and assumed $50 billion of the MBS they held, realizing billions of dollars of losses and repackaging some of it for resale to investors.
The Wall Street banks maintain that the five corporates were sophisticated investors who were warned of the risks of the MBS going bad. In fact, representatives of several of the doomed corporates told Credit Union Journal as the investments were failing that they were well aware of the risks when they purchased the MBS and were covered by so-called credit enhancements, such as over-collateralization or private bond insurance.
The gist of the banks’ argument now is that NCUA waited far too long to bring the claims because federal law on commercial transactions bar such claims under statutes of limitations or statutes of repose. They point out that some of the sales occurred as long ago as 2005, some five years before NCUA filed its first suits. In the most recent suit, which NCUA filed last month against Washington Mutual Bank (now a unit of JP Morgan), some of the sales go all the way back to 2006 a gap of seven years.
The Wall Street lobby group said in its amicus curiae brief that it has two principal reasons to oppose the NCUA claims. The first is the “fair and timely enforcement of federal securities laws to deter and remedy wrongdoing.” “One key component is the consistent application of the statutes of repose that are a critical part of these laws. Such statutes provide certainty and finality, set a time after which market participants are free from the fear of lingering liabilities and state claims, and ensure that claims can be adjudicated based on evidence that is fresh.”
The second is whether Congress meant to extend the statutes of repose for NCUA when it passed the S&L bailout law.
The appeal has broad ramifications for credit unions, as well as for Wall Street, because credit unions are paying for the estimated $20 billion Temporary Corporate Credit Union Stabilization Fund, which is being initially underwritten by NCUA. Any recoveries realized by NCUA from the Wall Street banks will go toward reducing the costs.
