Opinion

Felix Salmon

The government’s narrow anti-bank suits

By Felix Salmon
March 23, 2011

Liz Rappaport reports that the NCUA is getting tough with Goldman Sachs and other banks which sold corporate credit unions billions of dollars of toxic mortgage-backed securities:

In one of the broadest accusations that Wall Street helped cripple financial institutions during the crisis, the National Credit Union Administration, or NCUA, has threatened to sue several investment banks unless they refund over $50 billion of mortgage-backed securities sold to the five institutions, called wholesale credit unions…

Regulators seized the five wholesale credit unions in 2009 and 2010, inheriting a pile of battered bonds now worth only about $25 billion, or half of their face value.

This seems to me to be yet another form of weird selfishness on behalf of regulators who should really have the national interest, rather than their own self-interest, at heart. The FDIC’s suing WaMu directors? Yes, because the FDIC suffered losses. The NCUA’s threatening to sue Goldman? Yes, because the NCUA suffered losses. But what we’re not seeing here is any kind of government action against these banks which draws the logical conclusion: if Goldman needs to buy back all the bonds it sold to WesCorp, shouldn’t it also have to buy back all the identical bonds it sold to other investors?

What’s happening here is that Goldman is fighting a number of substantially identical claims on a case-by-case basis. Here’s its SEC filing:

Various alleged purchasers of, and counterparties involved in transactions relating to, mortgage pass-through certificates, CDOs and other mortgage-related products (including the Federal Home Loan Banks of Seattle, Chicago and Indianapolis, the Charles Schwab Corporation, Cambridge Place Investment Management Inc., Basis Yield Alpha Fund (Master) and Landesbank Baden-Württemberg, among others) have filed complaints in state and federal court against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material facts and material omissions and generally seeking rescission and damages. Certain of these complaints also name other firms as defendants. Additionally, the National Credit Union Administration (NCUA) has stated that it intends to pursue similar claims on behalf of certain credit unions for which it acts as conservator, and the firm and the NCUA have entered into an agreement tolling the relevant statutes of limitation. A number of other entities have threatened to assert claims against the firm in connection with various mortgage-related offerings, and the firm has entered into agreements with a number of these entities to toll the relevant statute of limitations. The firm estimates, based on currently available information, that the aggregate cumulative losses experienced by the plaintiffs with respect to the securities at issue in active cases brought against the firm where purchasers are seeking rescission of mortgage-related securities was approximately $457 million as of December 2010. This amount was calculated as the aggregate amount by which the initial purchase price for the securities allegedly purchased by the plaintiffs exceeds the estimated December 2010 value of those securities. This estimate does not include the potential NCUA claims or any claims by other purchasers in the same or other mortgage-related offerings that have not actually brought claims against the firm.

We’re given no indication, here, of the total amount of these bonds which was sold by Goldman: instead, we’re given the fraction of the bonds which are actually being litigated. And since the NCUA hasn’t filed suit (yet), that number is relatively small — less than half a billion dollars.

So long as government-run entities like the Federal Home Loan Banks and the NCUA look out only for their own self-interest here, both they and Goldman have every incentive to settle these suits out of court. But the government is meant to have a broader interest than that. Let’s say I bought one of these bonds but don’t have access to the government’s expensive lawyers. Why is it fair that the government should get Goldman’s money in an out-of-court settlement while I get nothing?

Yes, there are class actions pending against Goldman too, or at least putative class actions — they don’t seem to have been certified yet. But those class actions don’t have the extra force that comes from being brought by the government. If the government really believes that Goldman et al did something seriously wrong here, they should come down on those banks on behalf of all the victims. Not just the state-owned ones.

Comments
5 comments so far | RSS Comments RSS

The US Government or the Wall Street Government?

Posted by Woltmann | Report as abusive
 

The FDIC had no loss from WaMu. Their press release for the failure stated:

“WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” Bair said.

The entire press release is here:

http://www.fdic.gov/news/news/press/2008  /pr08085.html

Posted by Eric_H | Report as abusive
 

I wonder if any of the investors in these funds suing GS are going to sue the fund managers for clearly misrepresenting their abilities when they were raising cash for those funds? Pretty sure i never saw a hedge fund manager claiming that a shaved chimp could do better than him/her, that any upside would purely be luck and they were patently not worth their 2 and 20. Now that would be a material ommission!

Posted by Danny_Black | Report as abusive
 

Could someone help me out here?
How much has this transaction cost the U.S. taxpayer?

Posted by jhkmtk | Report as abusive
 

You are wise to note the incoherence of the federal government’s response to the financial crisis. However, the incoherence is not at all due to “selfishness” on the part of the FDIC and the NCUA. What they are doing is the opposite of selfishness. Instead, it is due to the fact that those two agencies are luckily still run by persons of integrity who are willing to do their sworn duty despite pressures not to do so from the top levels of the administration.

Everything else you say is true. There should be broad civil and criminal charges against large numbers of major banks, investment banks and individuals. Literally hundreds of billions in remedies should be being pursued by the Department of Justice. The money damages cases are obvious Section 11 claims based on misstatements in the offering documents themselves. The criminal cases are obvious fraud, conspiracy, insider trading and perjury claims that could be based in large part on millions of emails that the DOJ could easily discover.

There has clearly been a “hands-off” order for Wall Street issued by President Obama, influenced by his inner circle of Geithner and Holder. What you are seeing at the FDIC and NCUA is a couple of brave federal officials with integrity and independence who are actually doing their duty. The higher-ups dare not stand in their way (yet) because that would make their hypocrisy too obvious.

Posted by WithoutMalice | Report as abusive
 

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