Will bank defendants come to regret shelling out nearly $20 billion to the Federal Housing Finance Agency and about $350 million to the National Credit Union Administration to resolve allegations that they misrepresented mortgage-backed securities peddled to government-regulated entities? In the not-too-distant future, the 2nd U.S. Circuit Court of Appeals is going to be looking again at an issue that might have wiped out most of the FHFA and NCUA claims. The 2nd Circuit sided against the banks when it first looked at the defense in 2013 – which is one big reason why FHFA and NCUA have been able to squeeze so much money from them. But this time around, the appeals court is going to have to figure out what to do about a 2014 U.S. Supreme Court case that has persuaded two federal district judges in Manhattan to disregard the 2nd Circuit’s 2013 precedent.
Goldman Sachs has a little more than two months for a miracle to happen.
Otherwise, on Sept. 29, the bank will go to trial in federal court in Manhattan against the Federal Housing Finance Agency to defend claims that Goldman deceived Fannie Mae and Freddie Mac about the quality of the mortgage-backed securities it was peddling before the financial crash.
Has there ever been a more lopsided multibillion-dollar case than the Federal Housing Finance Agency’s fraud litigation against the banks that sold mortgage-backed securities to Fannie Mae and Freddie Mac? I don’t think U.S. District Judge Denise Cote of Manhattan, who is overseeing securities fraud suits against 11 banks that haven’t already settled with the conservator for Fannie and Freddie, has sided with the banks on any major issue, from the timeliness of FHFA’s suits to how deeply the defendants can probe Fannie and Freddie’s knowledge of MBS underwriting standards in the late stages of the housing bubble. But even in that context, Judge Cote’s summary judgment ruling Monday – gutting the banks’ defenses against FHFA’s state-law securities claims – is a doozy.
Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.
When I first read the Federal Housing Finance Agency Inspector General’s report criticizing Freddie Mac’s $1.35 billion MBS put-back settlement with Bank of America, I wondered if the FHFA IG had just exposed billions of dollars in untapped bank liability. The IG report notes, after all, that Freddie’s deal with BofA (unlike Fannie Mae’s simultaneous $1.52 billion BofA settlement) resolves not only pending breach of contract claims, but also any future claims that Countrywide breached representations and warranties on the mortgages it sold Freddie. Those are exactly the kinds of global settlements banks are going to have to reach if they have any hope of resolving their MBS put-back liability.
Last Friday evening, after the Federal Housing Finance Agency filed 17 blockbuster suits against just about every major issuer of mortgage-backed securities, the buzz was about the staggering size of Fannie Mae and Freddie Mac’s investments in mortgage-backed notes and certificates. The suits, 13 filed by Quinn Emanuel Urquhart & Sullivan and four by Kasowitz Benson Torres & Friedman, cite about $196 billion in MBS holdings by Fannie and Freddie. Under both state and federal damages theories, the suits demand rescission, or a buyback of the notes by their issuers. Does that mean we should we assume that FHFA has $196 billion in claims?
The Federal Housing Finance Agency’s reported mortgage-backed securities suits against a slew of major banks haven’t yet been filed. But if you want to know what they’re likely to look like, check out Mass Mutual’s 168-page MBS complaint against Bank of America, Merrill Lynch, Bear Stearns, and J.P. Morgan, filed Thursday. (It’s so big the Massachusetts federal court docket split it into four parts: here, here, here and here.) Or you could look at AIG’s $10 billion megasuit against BofA, Countrywide, and Merrill, filed on Aug. 8, or Allstate’s 114-page complaint against Goldman Sachs on Aug. 15, or U.S. Bank’s MBS breach of contract suit against BofA, which came at the beginning of this week.