A federal judge yesterday questioned National Credit Union Administration’s (NCUA) claims of malfeasance in the sale of MBS to WesCorp Federal Credit Union by RBS Securities.
He also issued a preliminary ruling that the credit union regulator has failed to show the Wall Street bank and related entities disregarded their own underwriting standards in the creation of and sale of the MBS.
The preliminary ruling by U.S. Judge George Wu casts doubt on several other suits NCUA has brought against Wall Street banks, including JPMorgan Chase, Goldman Sachs and Wachovia Securities (now part of Wells Fargo) in the failure of five corporate credit unions, including U.S. Central Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union, as well as WesCorp. NCUA claims in the suits the Wall Street banks ignored their own underwriting standards when they bought and packaged subprime loans for sale as MBS to the doomed corporates. NCUA, which assumed all WesCorp claims as its liquidating agent, is seeking $629 million from the securities subsidiary of Royal Bank of Scotland (RBS), itself a massive failure, which was taken over by the British government during the financial crisis.
NCUA, Wu said, relied on statistics showing how the investments failed following the collapse of the housing market, which Wu described as “conclusory," according to a lawyer for one of the defendants in the case. Without additional information, the suit would fail the pleading standards set forth in prior Supreme Court rulings, he said. The Judge requested physical copies of the offering prospectus for the MBS and will review the additional information before making a final decision on how the case will proceed.
Wu is the judge who dismissed charges earlier this year against WesCorp directors in a separate civil suit brought by NCUA in the failure of the one-time $34 billion corporate, ruling that NCUA could not hold the volunteer board members accountable for poor business judgment in the massive failure. NCUA’s charges against senior management of WesCorp in the case are still pending.
Yesterday’s hearing was on a motion to dismiss the case brought by RBS, Wachovia Mortgage Loan Trust and Nomura Home Equity Loan, Greenwich Capital Acceptance, all defendants in the NCUA suit.
In the RBS case, NCUA claims the sellers and underwriters of the questionable securities made numerous material misrepresentations to WesCorp in the offering documents for more than $1.2 billion of MBSs that went bad just months after their sale. These misrepresentations caused WesCorp to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial, according to NCUA. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering WesCorp insolvent. NCUA estimates the WesCorp failure will cost $7 billion, which will be accrue to all federally insured credit unions in the form of a corporate bailout assessment.
NCUA has filed a separate suit against RBS in federal court in Kansas relating to the sale of hundreds of millions of dollars of RBS to U.S. Central, the one-time $52 billion corporate.
