NEW HAVEN, Conn. – NCUA this week joined a local union in asking a federal appeals court here to overturn a lower court ruling dismissing the union’s claims against several Wall Street banks regarding mortgage backed securities the banks sold to the union.
The case of the New Jersey Carpenters’ Health Fund is critical to NCUA, which has made similar claims against several of the same Wall Street banks, including RBS Securities, Greenwich Capital Holdings and Wachovia Securities (now a unit of Wells Fargo). NCUA also is suing JP Morgan Chase and Goldman Sachs over the same issues.
In its ruling against the Carpenters’ Union last year, the U.S. District Court for the Southern District of New York struck down many of the same arguments made by NCUA in its suits, mostly that the originators of the loans and the banks that packaged the loans into MBS knew the mortgages would fail when they sold the securities to the corporates. NCUA has filed a total of five suits that could hinge on the court’s ruling.
NCUA, which filed an amicus brief with the U.S. Court of Appeals for the Second Circuit Tuesday, said the lower court erred when it ruled that the banks’ boilerplate warnings were sufficient in notifying the buyers of the MBS that the underwriters of the loans – in most cases subprime lenders – may violate their own underwriting standards.
The lower court also erred, according to NCUA, when it ruled that statistical arguments, news reports and anecdotal evidence about systemic disregard of underwriting standards were not enough to prove negligence against the Wall Street banks in their packaging of billions of dollars of mortgages into MBS.
NCUA argues to the appeals court that as liquidating agent for the five corporate, it is a proper party to intervene in the Carpenters’ Union case. NCUA stands to gain more than $1 billion to help offset the costs of the failures of U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.
The Wall Street banks argued in the Carpenters’ Union case, as they have in the NCUA cases, that the MBS failed because of the market-wide mortgage meltdown. In addition, they asserted the union fund and the corporates were sophisticated investors, to whom the risks were properly and comprehensively disclosed. The lower court agreed.
NCUA is asking the appeals court to clarify standards for the dozens of securities suits brought by MBS buyers against their Wall Street underwriters. “This court should clarify the key elements for a plausible Securities Act claim in an RMBS case,” said the NCUA brief.
NCUA is represented before the appeals court by the Washington firm of Kellogg, Huber, Hansen, Todd, Evans & Figel.