Reuters finance reporter Lauren Tara LaCapra has done a
great job this week of reading the fine print in quarterly
filings by Morgan Stanley and Goldman Sachs. On Monday, she
reported that Morgan Stanley's 10Q just happened to mention
that the bank had received a warning letter from Gibbs & Bruns. (Unless you have an allergic reaction to the words
"mortgage-backed securities," you surely know that Gibbs
represents the group of major institutions that forced Bank of
America into the negotiations that resulted in BofA's proposed
-- and embattled -- $8.5 billion settlement with Countrywide
MBS investors.) On Tuesday LaCapra found another nugget of gold
in Goldman Sachs's filing: The bank reported $15.8 billion in MBS litigation exposure, up from the $485 million it reported
three months ago.
La Capra's stories got me wondering: Do these beefed-up
disclosures represent a recognition by the banks that this
whole MBS thing may be more serious than they previously
believed? Or are they just covering themselves against
assertions that they didn't adequately warn about MBS
There's no question that MBS players are under a lot of
pressure to disclose more information about the MBS exposure.
As I've reported, both the Securities and Exchange Commission
and the Public Company Accounting Oversight Board have warned
banks and their auditors that they have to do a better job of disclosing their exposure to breach-of-contract buyback claims.
The bond insurers' trade group has been making the same noise.
As banks gear up for their end-of-the-year SEC filings, which,
remember, are audited and certified, they're clearly taking
these disclosure warnings seriously.
But they're also clearly facing more MBS litigation. (I told you so. . .) After JPMorgan Chase and Bank of America
filed their third-quarter results, Bloomberg reported last
month that the tally for bad MBS was up to a whopping $69 billion, with both banks noting a bump in put-back claims on
deficient underlying mortgages. Morgan Stanley's Nov. 1 10Q
said, "Recently, the level of litigation activity focused on
residential mortgage and credit crisis related matters has
increased materially in the financial services industry,"
citing, among other ongoing cases, the Sept. 2 MBS securities
fraud suits by the Federal Housing Finance Agency. But aside
from mentioning the Gibbs & Bruns letter -- which threatened
claims involving 17 trusts with an unpaid principal balance of
$6 billion -- Morgan Stanley didn't specify other potential MBS
litigation, although it did note that it has agreed to toll the
statute of limitations with some prospective claimants "on a
Goldman's 10Q is much more detailed. In addition to a
plethora of pending mortgage-related cases, the filing says, "A
number of other entities (including John Hancock and related
parties, HSH Nordbank, Norges Bank Investment Management,
American International Group, Inc. (AIG) and IKB Deutsche
Industriebank AG) have threatened to assert claims against the
firm in connection with various mortgage-related offerings, and
the firm has entered into agreements with a number of these
entities to toll the relevant statute of limitations." The
$15.8 billion in claims Goldman reported in the filing doesn't
include potential claims by those entities or potential
put-back claims (which Goldman said are not material).
Just for fun, I also took at look at Credit Suisse's
third-quarter results release. Credit Suisse, you may recall,
has been notoriously reluctant to acknowledge MBS put-back
liability. In its SEC 6K, filed Wednesday, the bank owned up to
more than $2.3 billion in outstanding reps and warranties
claims, up from $473 million in the fourth quarter of 2010.
Credit Suisse's filing suggests it's still not taking the reps
and warranties claims very seriously; it's taken only a $53
million "provision" on them, up from $29 million in 2010.
(Reporting by Alison Frankel)
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