He's not a state attorney general, but David Grais may soon become the lawyer that Wall Street hates most.

His New York firm, Grais & Ellsworth, is behind several of the most prominent investor lawsuits against securities dealers over MBS  issued during the boom years that have since soured. This week, Grais filed suit on behalf of the Federal Home Loan Bank of San Francisco (FHLB San Francisco), seeking to push $19.1 billion of failing securities back into the hands of the companies that issued or underwrote them. The defendants include Bank of America Corp., JPMorgan and several U.S. and foreign investment banks.

The case comes after a similar suit he brought in December for the Seattle FHLB, which wants to make BofA and several others eat $4 billion of MBS paper they sold.

Suits like these may be an inevitable byproduct of a financial crisis, but observers say the prominence of the plaintiffs shows that the cases are more than mere nuisances.

"One of the real hanging questions is the extent to which large institutional players remain on the sidelines," said Jeff Nielsen of Navigant Consulting, a firm that tracks and analyzes litigation over MBS. "When the Federal Home Loan banks are coming forward, that's conspicuous participation."

Grais' firm is arguing that, under both state and federal law, the securities dealers were obliged to ensure that the mortgages they securitized during the housing boom's waning months met the underwriting standards stated in each bond's prospectus.

"We think they'll have a hard time proving that," Grais said Wednesday. The Federal Home Loan Bank of San Francisco is suing under a state "blue sky" law, meaning that it would not have to prove misconduct or negligence to make its case.

"The only question is whether they correctly described the collateral, and if they didn't, it doesn't matter whether the dealer did or should have known," Grais said.

Bank of America declined to comment on the suits. JPMorgan did not respond to a request for comment.

The suits in some ways seek to turn on its head contractual language intended to shield the securities' issuers. For example, the prospectuses for bonds that Countrywide Financial Corp. sold to the Seattle and San Francisco FHLBs permitted the lender to include in the pools loans that did not meet the bond offerings' stated underwriting guidelines, so long as there were "compensating factors … demonstrated by a prospective borrower." Grais is challenging the idea that there were such compensating factors. (Countrywide is now a part of BofA.)

If Grais can get the suits into discovery, observers say, the banks will have trouble on their hands.

Litigating, or even settling, such cases would require what Navigant's Nielsen described as "trench warfare" — an across-the-board defense of a bank's lending standards on a granular level.
"That's not necessarily a desirable path to walk down for anybody," he said, "but the dollars at stake are enormous."

Others in the industry say that the FHLB suits may significantly change the dynamic for repurchase cases against banks.

Though mortgage insurers are seeking to force banks to take back mortgages on similar grounds, major institutional investors have long stayed on the sidelines, said securities lawyer Talcott Franklin of Talcott Franklin in Dallas.

The litigation has taken a long time to start, Franklin said, because of a "free rider problem" — no institutional holder wanted to take on the burden of a major suit by itself. But given continued feuding between investors and mortgage servicers, and a few precedents, "the reasons to stay on the sidelines are continually being eroded."

To many observers, a settlement seems out of the question. Franklin, the author of The Mortgage and Asset-Backed Securities Litigation Handbook, noted that Grais started his career by battling out insurance cases in an era when it was common for them to go to court.

Grais, 57, turned his attention to the securitization field in 2007, shortly after he and a small team of lawyers left Dewey Ballantine . At a lunch with his friend Jim Grant, the editor of Grant's Interest Rate Observer, Grais said he was looking into finding new areas of law to pursue.

"I told him I was interested in finding a class of assets which was very complicated and was going to run up massive losses," Grais recalled.

Grant suggested collateralized debt obligations. That got Grais started, and he and his new firm eventually settled on the underlying assets.

Not all of Grais' clients can argue they were duped about the quality of the securities they purchased. In a 2007 case he brought against Countrywide, his client, the hedge fund Greenwich Financial, bought the mortgage-backed securities only after Countrywide agreed to modify the underlying mortgages as part of a settlement of predatory lending charges brought by 11 states. Greenwich claimed that agreeing to modify the loans obliged Countrywide to repurchase the loans, boosting the securities' value.

There is nothing unseemly about that, Grais said. His clients simply read the pooling and servicing agreements governing the securities and noted they said "the value will rise if Countrywide honors its obligation." The Greenwich case is pending.

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