WICHITA, Kan. – Credit Suisse Securities said Friday in a motion to dismiss a civil suit brought by NCUA that the failed corporate credit unions it sold mortgage-backed securities to continued to buy risky MBS in order to boost investment returns even after they were repeatedly warned by NCUA of their strategies.
“Not only had NCUA expressly admonished the (corporate) credit unions regarding RMBS and the mortgage market, but “public storm warnings” regarding the problems besetting the mortgage industry were commonplace,” said Credit Suisse, one of eight investment banks being sued by NCUA over the sale of faulty MBS to five failed corporates.
The public sources of the “storm warnings” included government publications, congressional testimony, news articles and similar lawsuits against the same originators that NCUA is now targeting for culpability for the huge losses accrued by the corporates, Credit Suisse says in its motion to dismiss. Therefore, argues the investment bank either the failed corporates or NCUA should have launched its civil claims long before November 2012, long after all relevant statutes of limitation had expired, they argue.
A federal appeals court is scheduled to review whether NCUA waited to long to file suit against the underwriters of the MBS sold to the failed corporates.
The latest claims come as NCUA is expected to file new suits as soon as this morning alleging negligence by yet another investment bank in the sale of MBS to the failed corporates. So far NCUA has sued RBS Securities, Goldman Sachs, JP Morgan Chase, Barclay’s Capital, UBS Securities and Wells Fargo’s Wachovia Capital unit over MBS sold to the five failed corporates, U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU. NCUA has also reached out-of-court settlements with investment banks Citigroup, Deutsche Bank and HSBC.
The failure of the five corporates left NCUA holding $50 billion of MBS once owned by the institutions on which it expects losses of almost $20 billion.
NCUA claims the investment banks abandoned their stated underwriting standards by packaging subprime loans into MBS and marketing them as Triple A paper. The loans went bad at unprecedented rates causing fast and huge default rates on the MBS.
Credit Suisse sold $715 million of MBS to three of the corporate failures, U.S. Central, WesCorp and Southwest between October 2005 and June 2007.
Credit Suisse claims that the corporates were sophisticated investors and knew the risks of their investments based on comprehensive disclosures included in offering documents. The investment bank says NCUA officials on numerous occasions cited adverse mortgage market conditions for the failure of MBS. “NCUA cannot have it both ways,” says Credit Suisse in its latest filing, “if NCUA relies on generalized industry-wide allegations to support its claims, those facts necessarily are sufficient to have put the (corporate) credit unions on notice of those claims.”
The Wall Street bank says the corporates and then NCUA had extensive opportunity to bring civil claims against the underwriters of the MBS long ago, as the securities were sold to the corporates as much as seven years before NCUA brought suit and that no state or federal law allows that amount of time to expire before commencement of a civil claim. “Thus, all claims were time-barred before NCUA placed the credit unions in conservatorship,” says Credit Suisse.