Will big banks' suit against NCUA be a bust?

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A lawsuit from the big banks targeting the National Credit Union Administration isn’t likely to go far.

That’s the word from some analysts after a suit last month from a group of banks claiming the NCUA breached its settlement agreement in a previous case regarding mortgage-backed securities sold to now-defunct corporate credit unions.

The suit, filed by Bank of America, Merrill Lynch and Countrywide, alleges that NCUA’s board, as liquidating agent to the six credit unions that purchased MBS issued by the bank plaintiffs, failed to live up to the terms of a March 2013 settlement agreement. In the original settlement agreement, the NCUA agreed to use “good faith” and “best efforts” to obtain releases for banks in any actions that the NCUA subsequently pursued against third parties involving the banks’ MBS.

But now the plaintiffs allege that the NCUA failed to obtain third-party indemnification releases that would have protected the banks from paying liabilities to those parties. In essence, the plaintiffs asserted that the NCUA “would not be entitled to recover from those third parties amounts that the third parties could then turn around and recover from plaintiffs,” according to the suit.

At least one analyst, however, said he believes the suit will ultimately be dismissed.

“The NCUA has pursued this matter in good faith and the courts will see that,” said Geoff Bacino, a credit union consultant and former NCUA board member. “The banks are trying to lay blame on the credit unions but I think this accusation will fall by the wayside.”

Bacino served on the NCUA board before the corporate credit union crisis and was not involved in the original suit against the banks.

“Legal experts familiar with these kinds of recovery suits say this kind of back-and-forth is typical — the banks clearly want to wall themselves off from further financial liability,” said John McKechnie, a senior partner at Total Spectrum.

McKechnie added that this is just the latest front in what is “likely to be a prolonged battle in the courts, and I’m not sure I see an endpoint.”

The NCUA declined to comment on active litigation, but Christopher Pippett, a partner at Fox Rothschild in Exton, Pa., said the agency’s goal may simply be to recover as much as possible.

“They have thus far recovered about $5.1 billion, but the total losses to the share insurance fund from these failed securities was approximately $16 billion,” he said.

More than $1.2 billion of those recoveries have been put toward the agency’s legal fees, and many analysts said the NCUA has been successful enough at this point that it has little incentive to stop. In part because of successful suits already, the agency last year returned more than $736 million to credit unions. As a government agency, the NCUA’s ability to work with lawyers from the Department of Justice has also helped keep costs down, sources said, meaning the agency isn’t as strapped as it might otherwise be — especially considering it is fighting a simultaneous court challenge to its revised field of membership rule.

“We expect that the NCUA takes very seriously its obligation to act in a financially prudent manner and in the interests of credit unions on these matters,” said Mitria Wilson, senior director of advocacy and counsel at the Credit Union National Association. “Accordingly, there is no reason for us to expect that they have not already conducted an analysis and determined that they have the financial resources to pursue these claims.”

Pippett noted that even if the banks’ suit is not dismissed, they may still ultimately elect to settle.

“It usually comes down to a business decision,” he said. “You weigh your potential exposure together with the cost of continuing to litigate. No one wants to spend money on legal expenses if they don’t have to. That’s not always a good business practice.”

Thus, even though many of these big banks have very deep pockets, they may make the decision not to keep fighting the NCUA in these cases.

“We hope that there is an endpoint and that it involves the large banks being held accountable for the costs that credit unions have already incurred,” Wilson said.

Attorneys for the plaintiffs in this suit did not return requests for comment.

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Litigation MBS Securities Corporate credit unions NCUA CUNA Fox Rothschild Merrill Lynch Bank of America