Welcome to the MBS party, SEC — you’re only 3 years late!
If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.
The SEC is not, of course, an ordinary investor. On Wednesday night, the Wall Street Journal broke the news that the SEC plans to send Wells notices, otherwise known as target letters, to several banks that issued mortgage-backed notes and certificates. The Journal said the agency is looking at whether the banks misled investors about the quality of mortgage loan pools underlying securities issued in 2007 and 2008.
But here’s the thing: The first federal-court MBS class action, against Countrywide, was filed in 2007. By 2008, bond insurers and private investors were busily suing MBS issuers in state and federal courts in New York, starting the clock on the three-year statute of limitations for suits under the federal Securities Act of 1933 and the two-year time limit for fraud cases under the Exchange Act of 1934. Private investors who entertained thoughts of bringing federal claims for mortgage-backed notes issued in 2007 and 2008 would be tossed out of court quicker than you can say “time-barred.”
The SEC, in other words, is running at least three years behind the private securities bar when it comes to MBS litigation. I’ve heard, in fact, that the agency has recently been working with private lawyers to hone its MBS investigation. That makes sense: The list of plaintiffs’ firms that have sunk thousands of hours and millions of dollars into their MBS cases includes Quinn Emanuel Urquhart & Sullivan; Bernstein Litowitz Berger & Grossmann; Kasowitz Benson Torres & Friedman; Patterson Belknap Webb & Tyler; Cohen Milstein Sellers & Toll; Robbins Geller Rudman & Dowd and others.
The mystery is why the SEC has taken so long to see what’s been in front of its face. Remember, the agency spent years investigating Countrywide and its leadership. Weren’t mortgage-backed securities part of the investigation? Same thing with Fannie Mae and Freddie Mac, the two biggest players in mortgage securitization. The SEC began looking at Fannie and Freddie in 2008, and ultimately sued three top execs from each housing agency for allegedly misleading investors about subprime mortgage exposure. Surely someone at the SEC looked at the MBS portfolios Fannie and Freddie amassed — particularly because both agencies reached MBS settlements with Bank of America and GMAC’s Residential Capital in 2010.
Moreover, Fannie and Freddie’s conservator, the Federal Housing Finance Authority, gave the SEC a pretty good road map for MBS litigation with its 17-suit blitzkrieg last summer. (Interestingly, the FHFA may have its own time-limit problems with those cases.) Another arm of the federal government, the National Credit Union Agency, was one of the first MBS plaintiffs to wrest settlements from some of the banks that issued deficient securities. The Justice Department filed an MBS civil suit against Deutsche Bank last May. And the SEC itself warned MBS issuers about their obligation to disclose put-back claims back in October 2010. (The Financial Times reported last September that the SEC was investigating MBS disclosure failures — a pet peeve of the bond insurers’ trade association — but the Journal‘s story Wednesday suggests a broader SEC probe of securitizations.)
It can only help the monolines and private investors deep in MBS cases to be able to cite parallel SEC suits, but that’s small comfort to Joel Laitman of Cohen Milstein, an MBS litigation pioneer. A year ago, when Laitman was arguing at the U.S. Court of Appeals for the Second Circuit that credit rating agencies should be liable for blessing deficient mortgage-backed notes, Circuit Judge Jose Cabranes asked why the government hadn’t brought a case if the securitization industry was as corrupt as Laitman asserted. “I didn’t have an answer,” Laitman told me Thursday. “No one had an answer.”
Laitman, who lost the Second Circuit appeal, said it’s frustrating that only now has the SEC awakened to MBS abuses. “It’s so late to the game,” he told me. “There’s been a total absence for four years of any meaningful government response.” (An SEC spokesman declined comment, but pointed me to the agency’s “aggressive [record] on the credit crisis front.”)
I’ve been dubious about the new joint MBS task force, but Wells notices to banks means the SEC is serious about its investigation. That’s a good thing. I can’t help joining Laitman, though, in wondering how all of the private MBS cases of the last three years would have been different if the agency had acted sooner.
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