Recently, nine banks were sued by the U.S. regulator for
credit unions - National Credit Union Administration (NCUA) -
over the sale of mortgage-backed securities (MBS) worth
approximately $2.4 billion. The lawsuits filed in a U.S. district
court in Manhattan accused the banks of misrepresentations
related to the underwriting and sale of MBS.
The NCUA alleged that the banks, including
) and Morgan Stanley Capital I Inc,
JPMorgan Chase & Co.
) Bear Stearns unit,
Credit Suisse Group AG
The Royal Bank of Scotland Group plc
) sold these faulty securities to Southwest and Members United
corporate credit unions.
Goldman Sachs Group, Inc.
Wells Fargo & Company
) Wachovia Corp division, as well as Residential Funding
Securities LLC, which is presently known as Ally Securities, were
also included in the lawsuit.
The NCUA charged the banks for making misleading statements and
omitting important facts in the offering documents of the
securities sold to the plaintiffs. Due to the banks'
misrepresentations, the credit unions perceived the MBS to be
less risky in nature when on the contrary, they were not so.
Moreover, the NCUA accused the banks of ignoring the
underwriting guidelines specified in the offering documents. The
credit unions paid roughly $416 million for the securities in the
Morgan Stanley lawsuit and almost $1.9 billion for securities
sold by the other defendants.
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As a result, when these MBS lost their value due to defaults in
the underlying assets, the value of investments by the credit
unions in these securities also fell. Subsequently, the credit
unions collapsed, triggering a crisis in the credit union
Notably, this is not the first time that these major banks are
embroiled in a legal hassle with the NCUA. Earlier, the U.S.
regulatory body had sued Morgan Stanley and demanded the recovery
of losses worth $566 million related to the sale of residential
MBS to 2 corporate credit unions that have now collapsed.
Such cases will result in mounting litigation risks for these
banks and dent its image as well as financials. On the other
hand, recoveries by the NCUA will result in lowering of the
losses that stemmed from the failure of the credit unions.