LONDON, Sept 6 (Reuters Breakingviews) - Just when
investors in European and U.S. banks thought things couldn't
get worse, 17 financial institutions have been sued over $196
billion-worth of toxic mortgage bonds. Bank shares fell up to
12 percent across Europe with U.S. markets closed. But it's
hard to rationalize the falls on the basis of the lawsuit
alone.
Investors' fears are understandable. The central allegation
is that banks misrepresented mortgage deals packaged up and
sold to quasi-state mortgage giants Fannie Mae and Freddie Mac.
Whatever the merits of the case -- and Deutsche Bank, and Bank
of America have pointed out that Fannie and Freddie are no
neophytes in the mortgage world -- it's not good to get into a
scrap with the Federal Housing Finance Agency. Moreover, no
specific claims for damages have been registered, leading
investors to fear the worst. There is also a worry that a
successful case could open the gate to private-sector
litigation.
But the scale of the sell-off seems to far outweigh any
plausible case for damages that the FHFA could make. The six
affected European banks saw their shares lose almost $19
billion in value on Sept. 5, more than a quarter of the $71
billion of bonds they underwrote.
But UBS, which was sued over alleged mis-representation
concerning $4.5 billion-worth of mortgage bonds in July,
disclosed that $900 million in damages, or 20 percent, is being
sought by the FHFA. And it's unlikely that the agency would win
its entire claim.
Now consider Barclays. The FHFA suit concerns eight bond
packages that ended up with delinquency, default or foreclosure
rates averaging 40 percent. That equates to just under $2
billion at par value. Barclays' market value fell by 9 percent
more than this. And these loans are not worthless.
Monday's sell-off was clearly also a lot to do with the
mass of nasties surrounding banks stocks -- an unresolved euro
zone crisis and fears of global recession. A jumbo lawsuit,
even one whose ultimate financial cost may be manageable and
distant, could hardly have landed at a worse time.
CONTEXT NEWS
-- The Federal Housing Finance Agency (FHFA) on Sept 2 sued
17 financial institutions which, it alleges, mis-sold $196
billion worth of securities to Fannie Mae and Freddie Mac.
-- The FHFA was established amidst the financial crisis as
"conservator" for the two entities, which invest in and
guarantee American mortgages worth trillions of dollars. The
pair were bailed out by the U.S. government, which has spent
$170 billion in an attempt to keep the pair solvent after they
lost billions as American house prices collapsed.
-- The FHFA sued UBS over alleged mis-selling of $4.5
billion of mortgage bonds in July. UBS revealed in its second
quarter financial report in July that it faces demands from a
counterparty -- believed to be the FHFA -- amounting to $900m,
or 20 percent of the par value of the affected loans.
-- The FHFA's latest suits were filed shortly before a
three-year deadline for filing lawsuits over the bonds runs
out.
(By Margaret Doyle and Agnes Crane, Reuters Breakingviews
columnists. The opinions expressed are their own.)
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