WICHITA, Kan. – A federal court yesterday rejected a bid by RBS Securities to dismiss $1.9 billion of claims against it by NCUA over the failure of U.S. Central FCU, giving the federal regulator a much-needed boost to its dwindling prospects for recoveries on almost $10 billion of claims against Wall Street banks.

The ruling by the U.S. District Court for the District of Kansas—where U.S. Central was based-comes after the same court dismissed billions of NCUA claims against JP Morgan Chase, Bear Stearns, UBS Securities and Credit Suisse Securities, and a federal court in California dismissed the majority of claims against Goldman Sachs, ruling that NCUA’s filing of civil suits were too late to satisfy the statute of limitations. NCUA has filed appeals trying to reinstate those claims.

In each of the case, NCUA claims that residential mortgage-backed securities underwritten by the Wall Street banks were packed with subprime loans that did not meet the underwriters’ own standards and the resulting losses on the RBS caused the failure of U.S. Central, the one-time $52 billion central bank for credit unions, and four other corporates.

The RBS case has broad ramifications for Wall Street as it lists as codefendants Greenwich Capital Acceptance, a unit of RBS, as well as Freemont Mortgage Securities, Residential Funding (a unit ResCap), IndyMac, Novastar Mortgage, Nomura Home Equity, Wachovia Mortgage and Saxon Asset Securities.

In yesterday’s decision, Judge John Lungstrum rejected arguments by RBS, a unit of Royal Bank of Scotland, that NCUA’s claims about the quality of the loans packaged into RBS were not specific enough. “Not only are those alleged misrepresentations independently actionable, they provide a connection to

the particular certificates at issue and thus support a plausible claim based on the abandonment of underwriting guidelines,” wrote Judge Lungstrum.

The Judge also rejected the RBS defense that it was not responsible for allegations that many of the loans packaged into the mortgage bonds were not owner-occupied, as asserted in the offering prospectuses, saying the Wall Street bank is responsible for complying with its own offering guidelines.

The Judge also rejected RBS’ arguments that NCUA’s claims for losses on the bonds were inaccurate, saying even if that were so—and NCUA has touted lower losses on the bonds in recent months—the losses are still significant as to warrant civil action.

“The Court agrees that plaintiff’s use of the term “loss” in this context is a bit misleading, as those figures actually represent only the amounts in default at particulartimes, before recovery allows the actual realized loss to be determined,” wrote the Judge. “Nevertheless, the Court agrees with (NCUA) that the fact that actual defaults exceeded expected defaults within a short time after issuance has relevance. Although such evidence may not be as strong as a surge in actual over expected losses, it nevertheless does support the inference that the loans were not underwritten properly.”

NCUA’s claims are critical to its efforts to recoup the costs of the corporate bailout, now $10 billion and projected to rise to as much as $16 billion. The brunt of the costs are related to the liquidation of U.S. Central and WesCorp FCU, the one-time $34 billion California corporate, and also include costs to resolve the failures of Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.

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