The National Credit Union Administration filed a lawsuit against Barclays, alleging the bank's sale of faulty mortgage-backed securities to two corporate credit unions — U.S. Central and WesCorp — contributed to their 2009 collapse.
The suit, filed in U.S. District Court for the District of Kansas, says Barclays negligently packaged subprime mortgages into securities that quickly defaulted. Barclays sold over $555 million in securities to U.S. Central and WesCorp.
"Trust and accountability are two cornerstones of our financial system," said NCUA Chairman Debbie Matz. "As clearly outlined in our complaint, Barclay's violated that trust by issuing faulty disclosures on securities underwritten by the firm. As a result, two corporate credit unions collapsed, and the entire credit union industry experienced a crisis."
The suit is not without irony, because Barclays was the underwriter for $28 billion worth of NCUA Guaranteed Notes sold last year to investors to finance the corporate bailout.
The NCUA has filed similar claims against JPMorgan Chase, Goldman Sachs, RBS Securities, UBS Securities and Wachovia Securities, now a unit of Wells Fargo. The regulator has settled similar claims out of court with Citibank, HSBC and Deutsche Bank.
The collapse of U.S. Central and WesCorp, in addition to three other corporate credit unions (Members United Corporate, Southwest Corporate and Constitution Corporate), are projected by the NCUA to cost credit unions as much as $20 billion to resolve.
The NCUA's complaint alleges Barclay's made numerous misrepresentations and omissions of material facts in the offering documents of the securities sold to the failed corporate credit unions. The complaint also alleges systemic disregard of the underwriting guidelines stated in the offering documents. These misrepresentations caused U.S. Central and WesCorp to believe the risk of loss was minimal, when in fact, the suit alleges, the risk was substantial.