Saying that it failed to disclose the risks to two now-defunct corporate credit unions, the NCUA is suing the company formerly known as Wachovia Securities.
The suit, filed Nov. 29 in federal court in Kansas, alleges that residential mortgage-backed securities the firm sold to U.S. Central FCU and Western Corporate FCU were significantly riskier than represented in the offering documents and the securities were destined from inception to fail.
U.S. Central bought $43.9 million in RMBS from Wachovia and $78.1 million in RMBS underwritten by Wachovia. WesCorp bought $44.3 million of RMBS from Wachovia.
Since it was purchased by Wells-Fargo, the firm is now known as Wells Fargo Securities.
The lawsuit is the latest in a series of lawsuits the NCUA has filed against firms that sold securities to corporate credit unions. As in the other lawsuits, the agency isn’t alleging fraud, which is often hard to prove.
“The NCUA continues to do everything within our authority to seek maximum recoveries and ensure that those who caused the problems in wholesale credit unions pay for the losses incurred by retail credit unions,” NCUA Chairman Debbie Matz said in a statement. “By filing these suits, we intend to hold responsible parties accountable for their actions.”
The NCUA had previously sued J.P. Morgan Securities, RBS Securities and Goldman Sachs for not fully disclosing the risks when it sold RMBS to the corporates.
The collapse of the housing market caused the value of those securities to plummet, leading to massive losses to the corporates. That convergence of events required the NCUA to rescue some of them, with the help of a loan from the Treasury Department.
The credit union system is paying for the rescue through annual assessments. This year’s assessment was 25 basis points. The agency projects that next year’s assessment will be between 8 and 11 basis points.
The NCUA has said that the remaining costs of the corporate credit union rescue will be between $1.8 billion and $6.1 billion between next year and 2021. Larry Fazio, who runs the agency’s Office of Examination and Insurance, said last month that it is possible that the assessments will end before 2021.
The NCUA conserved U.S. Central and WesCorp in March 2009 and liquidated them in October 2010. The agency also conserved and liquidated Constitution Corporate FCU, Members United Corporate FCU and Southwest Corporate FCU.
On Nov. 14, the agency announced it had reached settlements totaling $165.5 million with Citigroup and Deutsche Bank Securities over the sales of residential mortgage-backed securities to the five corporate credit unions that failed.
The settlements, in which the banks admitted no guilt, are for $20.5 million from Citigroup and $145 million from Deutsche Bank Securities.