The Wall Street Journal dropped the bombshell: “Banks Hit for Credit Union Ills,” read the headline on an article reporting that the NCUA was in talks with a bevy of Wall Street powerhouses (Goldman Sachs, Merrill Lynch, Citigroup and JPMorgan Chase) about the NCUA’s belief that Wall Street banks sold corporate credit unions fraudulently mislabeled bonds that underestimated the degree of risk associated with the instruments.
The rest of the story is that when various corporate credit unions imploded–notably WesCorp and U.S. Central–billions of dollars vanished in bad investments. Now, the NCUA wants the Wall Street banks to make good on the toxic instruments they sold or face possible lawsuits.
That NCUA was contemplating this action for some months apparently was well known inside the Beltway, according to sources that asked not to be named.
Nothing was official, however, and it is only when Goldman Sachs noted a possible NCUA legal action in its recent 10K filing that matters jumped into the public eye. In the 10K, Goldman said, “the National Credit Union Administration (NCUA) has stated that it intends to pursue...claims on behalf of certain credit unions for which it acts as conservator, and the firm and the NCUA have entered into an agreement tolling the relevant statutes of limitation.” This statement occurs in a paragraph where Goldman discusses a rash of litigation arising from mortgage-related products.
The NCUA, for its part, declined to comment on its intentions in terms of legal action or on any possible negotiations with the Wall Street firms. In a March 30 e-mail a spokesman said, “NCUA does not comment on pending legal matters.”
But there are plenty of outside experts with opinions about where this NCUA collection attempt may wind up and if it in fact has a chance of success.
“The way to win this is by showing that the statements made by the sellers of the securities were false. There are laws against selling securities by misrepresentation,” said Thomas Hatch, a partner with Robins, Kaplan, Miller & Ciresi LLP, who leads the firm’s financial services group. “A lot of money is at stake, there are many [similar] cases, but I believe NCUA has a good chance of prevailing.”
As for other cases, Hatch pointed to a series of suits filed by Allstate Insurance in February, against multiple Wall Street firms. The suits hinge on the contention that the banks misrepresented the risk involved in the mortgage-backed securities they sold, overstating the quality of the borrowers. Collectively, Allstate is looking for over $1.4 billion in refunds.
On the federal level, the Federal Home Loan Bank has filed numerous actions against banks, and the FDIC has some cases in progress but, by any yardstick, the NCUA actions, if they move beyond the talk stage, could quickly involve immense amounts of cash, easily upwards of $25 billion. About that much was lost by corporate credit unions on their MBS investments.
No other federal agency has staked out such a dramatic and large legal position, although other agencies, including the Treasury and the FDIC, have growing holdings of toxic MBS.
Does the NCUA in fact have a good case? NAFCU’s Fred Becker believes the agency probably does. “Remember, they have all the records. They own WesCorp and U.S. Central,” he said. Becker also indicated he doubted the regulator would threaten litigation unless it believed itself to be on solid legal footing.
At CUNA, General Counsel Eric Richard expressed less optimism. “NCUA is looking at the right kind of parties if it intends to attempt to reclaim billions in securities- related corporate credit union losses from the biggest Wall Street firms,” he said. “These institutions have the potential to provide significant reimbursement of the credit union system's recent losses. However, reclaiming such losses may be a long, arduous process for the agency.”
Kev Alverson, a partner at banking consultancy Novantas, said that a possible NCUA suit “has merit on its face” but cautioned that the banks would counterattack with an argument that the corporates that put tens of billions of dollars into MBS purchases should have known what they were buying.