NCUA Suit Seeks Bank Payback on Corporate MBS
Reactions to the $800 million in lawsuits filed June 20 by NCUA against J.P. Morgan Securities and RBS Securities over what NCUA claims were fraudulently packaged mortgage-backed securities heated up as experts debated exactly what is going on and what the litigation means to credit unions.
Key to the situation is that it is dynamic. The NCUA confirmed in an email to Credit Union Times that more suits against other big Wall Street banks can be expected. Lawrence Remmel, an attorney with Pryor Cashman in New York, indicated he had heard as many as 15 banks might be sued by the NCUA.
Other experts suggested that in all the NCUA will be suing for as much as $8 billion to $10 billion, about the same as the net loss incurred by the credit union system from bad investments in MBS.
The numbers are immense, but Fred Becker, NAFCU CEO, insisted that no credit union should be counting on proceeds from any NCUA suits to lessen the need for payments into the corporate stabilization fund. Some credit unions have viewed the suits as relieving them of that responsibility, but, said Becker, the timeframe involved in the litigation could well be prolonged. "We may have made all the big payments required for corporate stabilization before the suits play out," he said. "I don’t see the litigation having a marked impact on NCUA assessments."
Evan Clark, CEO of the Department of Commerce Federal Credit Union in Washington, added that he expected the suits to settle rather than go through lengthy litigation probably inside 12 to 24 months but "for dollar amounts far below what NCUA is seeking." Clark elaborated that he expected settlements to be in a range of 10% to 30% of what the NCUA has filed for.
Remmel agreed. "The NCUA has clearly signaled it wants to settle" rather than see the cases through to trial, he said.
Could NCUA prevail were the cases to go to trial? Legal experts are divided. Some, Remmel, for instance, believe a compelling case can be made by the packagers of MBS that their conduct simply reflected the prevailing standards at the time they assembled the loan bundles.
Other lawyers disagree. Tom Hatch, a partner with Robins, Kaplan, Miller & Ciresi in Minneapolis, said, "A lot of money is at stake, and I do believe the NCUA can win. There was an enormous amount of fraud in how these securities were created."
One issue on which consensus is forming is what would come of any money collected by the NCUA. NAFCU’s Becker offers this viewpoint: "Any money collected has to go back to the credit unions and their members. It certainly cannot go to the NCUA budget. There is no question in my mind where this money needs to go when and if it is collected."
Also true is that, in the immediate aftermath, applause for NCUA continued to be heard. Said Clark, "I am very encouraged NCUA is doing this because it is the right thing to do. The banks who sold these bonds should be tarred and feathered and ridden out of town on a rail and now that may be happening."