In the first two of what promises to be several legal actions seeking compensation for the corporate credit union crisis, the National Credit Union Administration (NCUA) sued two of the biggest Wall Street banks last week seeking to recover losses from the now-toxic mortgage-backed securities they sold to four of the five failed corporates.

NCUA charges that JPMorgan Securities and RBS Securities, a unit of Royal Bank of Scotland, sold almost $1-billion of MBS to the four corporates — U.S. Central Federal Credit Union, WesCorp Federal Credit Union, Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union — that were stuffed with subprime loans that were passed off as triple A-rated. The suits were filed in U.S. District in Kansas City, which has jurisdiction over Lenexa, Kan.-based U.S. Central, the one-time $52-billion corporate.

"NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions," said NCUA Chairman Debbie Matz, referring also to the failure of Constitution Corporate Federal Credit Union.

"NCUA's legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions," Matz continued, "By these actions we intend to hold responsible parties accountable.”

In seeking recompense for the meltdown of the corporates NCUA has sued the top executives and directors of WesCorp and indicated it will file bond claims against directors and officers of U.S. Central, but has been slow to act otherwise, with no recoveries yet. Among the targets are believed to be Goldman Sachs and Bank of America, which now owns Countrywide, the biggest seller of MBS to WesCorp, as well as the Wall Street rating agencies. NCUA declined to comment on potential targets.

Representatives of JPMorgan and RBS did not return phone calls seeking comment last week.
One foe NCUA is likely to run up against is the statute of limitations on some of its claims. NCUA said its suits against JPMorgan Chase and RBS Securities should be considered by the federal court as within the statute of limitations, even though some of the sales took place as long as five years ago.

Under the Federal CU Act, NCUA, as conservator of U.S. Central FCU and WesCorp FCU, which purchased billions of dollars in toxic MBS from the two firms, has a year "after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence," NCUA said in its separate suits. NCUA took the two corporate giants under conservatorship in March 2009, but has been working since then to determine the quality of the MBS purchased by the two corporate failures.

That means that NCUA should not be barred by any statute of limitations from suing the Wall Street firms, even though some of the MBS were purchased in 2006.

Meantime, the two suits show the nature of the subprime mortgages that were packaged into MBS by the Wall Street firms and sold to buyers like U.S. Central and WesCorp. The two suits show that the securities bought by U.S. Central and WesCorp, as well as Members United Corporate FCU and Southwest Corporate FCU, were created with loans originated by some of the most notorious subprime lenders, some of which eventually went bust, like IndiMac, Ameriquest, American Home, Fremont Home Loans, New Century, Option One, Washington Mutual, Wachovia, NovaStar and Countrywide Mortgage.

In its suits, NCUA alleges that JPMorgan and RBS ignored their own underwriting standards in accepting mortgages for securitization. Prospectuses offered by the two were erroneous, according to NCUA, because the "originators did not adhere to the stated underwriting guidelines, did not effectively evaluate the borrowers' ability or likelihood to repay the loans, did not properly evaluate whether the borrower's debt-to-income ratio supported a conclusion that the borrower had the means to meet his/her monthly obligations, and did not ensure that adequate compensating factors justified the granting of exceptions to guidelines."

The originators, claims NCUA, "systematically disregarded the stated underwriting guidelines in order to increase the volume of mortgages originated."

Virtually all of the MBS that turned out to be toxic were rated 'AAA' when they were bought by the corporates, according to the suits. NCUA is seeking $565 million in damages from RBS and $278 million from JPMorgan.

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