FDIC Sues Banks over Risky MBS - Analyst Blog

By Zacks | August 22, 2012 AAA

The Federal Deposit Insurance Corp. (FDIC) has filed three separate lawsuits against major banks over the alleged sale of $5.4 billion worth of risky mortgage-backed securities (MBS) to the failed Guaranty Bank. The FDIC, in aggregate, is seeking more than $2.14 billion in damages from various units of the banks.

Guaranty Bank, based in Austin, Texas failed in August 2009 and was acquired by Birmingham-based BBVA Compass, a wing of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA). At that time, Guaranty Bank operated 105 branches in Texas and 59 branches in California.

The FDIC has accused the lenders of presenting distorted facts related to the MBS they sold to Guaranty Bank. Moreover, the FDIC charged the banks of not disclosing authentic facts related to the quality of the underlying assets while selling risky MBS.

One of the litigation filed by the FDIC seeks nearly $900 million in damages for approximately $1.8 billion worth of MBS sold to Guaranty Bank. The defendants in this case include units of Ally Financial Inc., The Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DB) and JPMorgan Chase & Co. (JPM), among others.

In the second lawsuit, the FDIC has charged the units of financial institutions that include Bank of America Corporation (BAC), JPMorgan and The Royal Bank of Scotland Group plc (RBS) of selling $2.1 billion of MBS to Guaranty Bank. The regulator is seeking about $677.4 million in damages.

For the third and last case, the FDIC is demanding roughly $559.7 million from the units of banks that comprise Bank of America, Deutsche Bank and Goldman Sachs, among others. The lenders had sold MBS worth $1.5 billion to Guaranty Bank.

These lawsuits are almost identical to the one that was filed by the FDIC earlier this month. The regulator charged the units of Wall Street biggies like JPMorgan, Bank of America, Citigroup Inc. C), Wells Fargo & Company (WFC), Deutsche Bank, Credit Suisse Group (CS), HSBC Holdings plc (HBC), UBS AG (UBS), Ally Financial Inc. and Royal Bank of Scotland, among others of selling nearly $388 million of risky MBS to the failed Colonial Bank.

The FDIC's action comes as a major blow to the big banks that are already facing numerous litigations related to the sale of risky MBS. However, the investors and other financial institutions which suffered as a result of these faulty practices are expected to get a breather.

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