This issue of the Credit Crunch Digest focuses on recent developments in alleged Libor rate manipulation litigation; settlements in two mortgage-backed securities lawsuits; potential actions by state attorney generals regarding mortgage abuses; two newly proposed legislative bills to supplement the Dodd-Frank Act; and the Federal Reserve’s announcement regarding broadened oversight over financial institutions.

Libor Scandal

  • Proposed Libor Class Action Lawsuit Against Barclays Is Dismissed

Litigation and Regulatory Investigations

  • MBIA Inc. and Bank of America Reach Settlement on Claims Arising From Countrywide Acquisition
  • N.Y. Attorney General Prepares Suits Against Bank of America and Wells Fargo for Breaches of National Mortgage Settlement

  • UBS and Assured Reach Settlement in Mortgage-Backed Security Suit

Government and Regulatory Intervention

  • Senate Introduces “Too Big To Fail” Legislation for Dodd-Frank
  • Congress Voting to Limit Dodd-Frank Swap Regulations

  • Bernanke Acknowledges Analysis of Nonbank Financial Institutions

Libor Scandal

Proposed Libor Class Action Lawsuit Against Barclays Is Dismissed

U.S. District Judge Shira Scheindlin has dismissed a proposed class action lawsuit brought by holders of Barclays’ American depository shares who alleged that they lost money because of the bank’s alleged manipulation of the Libor interest rate.  Judge Scheindlin held that the investors did not show that Barclays and individual officer defendants misled the shareholders about Libor rates or took too long to reveal potential Libor-related liabilities.  Judge Scheindlin noted that “the notion that the market would fail to digest three years of non-fraudulent submission rates and other more detailed financial information, and would instead leave intact artificial inflation as a result of fraudulent submission rates during the financial crisis is implausible.”  According to the ruling, the investors could not show that alleged Libor manipulation between August 2007 and January 2009 caused investor losses through June 2012 (when Barclays reached alleged Libor manipulation settlements with U.S. and European financial regulators).  (Barclays wins dismissal of U.S. shareholder lawsuit over Libor,” Reuters, May 13, 2013)

Litigation and Regulatory Investigations

 

MBIA Inc. and Bank of America Reach Settlement on Claims Arising From Countrywide Acquisition
MBIA Inc. and Bank of America Corp. (BofA) have settled a five-year legal battle over defaulted mortgage debt.  The settlement will pay MBIA the equivalent of $1.7 billion and give BofA a 5 percent stake in the bond insurer.  As part of the settlement, MBIA will drop demands that BofA’s Countrywide unit buy back faulty home loans that MBIA guaranteed, and BofA will drop its challenge to a 2009 restructuring of MBIA. BofA will also provide the MBIA unit that guaranteed the lender’s mortgage debt a $500 million credit line.

These lawsuits arose out of BofA’s 2008 takeover of Countrywide Financial Corp., whose lax standards and subprime loans have been blamed for fueling the housing bubble.  Bond insurers, such as MBIA, have argued that they should be reimbursed for claims they paid on securitized pools of home equity lines of credit as a result of their reliance on Countrywide’s flawed underwriting.

This settlement is a positive development for MBIA, which had expressed in February that if it was unable to reach a settlement with BofA, it had “substantial doubt” that its MBIA Insurance Corp. unit could continue as a going concern. The settlement was also lauded by Benjamin Lawsky, New York’s superintendent of financial services.  (“MBIA Settles Five-Year Mortgage Fight with Bank of America,” Bloomberg Businessweek, May 6, 2013)

N.Y. Attorney General Prepares Suits Against Bank of America and Wells Fargo for Breaches of National Mortgage Settlement

New York Attorney General Eric Schneiderman recently announced plans to sue Bank of America (BofA) and Wells Fargo over claims that they breached the terms of a multibillion-dollar settlement intended to end foreclosure abuses.  The settlement in question is the National Mortgage Settlement, a $26 billion pact brokered last year between five of the country’s largest banks, and the attorneys general of 49 states.  According to Schneiderman, BofA and Wells Fargo failed to follow guidelines dictating how the banks were to field and process requests from homeowners attempting to modify their mortgages.

Schneiderman is the first attorney general to prepare a lawsuit against any of the five banks in connection with the settlement, but more may follow.  Martha Coakley, Massachusetts’ attorney general, recently sent a letter to the settlement monitor outlining “recurring issues” with mortgage servicers.  Representatives for both BofA and Wells Fargo issued statements saying that they will address the deficiencies and hope to resolve the issues. (“2 Big Banks Face Suits in Mortgage Pact Abuses,” NewYork Times Dealbook, May 6, 2013)

UBS and Assured Reach Settlement in Mortgage-Backed Security Suit

UBS AG has reached a settlement with Assured Guaranty Ltd. whereby UBS will pay $358 million to bring an end to a lawsuit that alleged UBS falsely overstated the quality of mortgage loans underlying residential mortgage-backed securities.  In its February 2012 complaint, Assured accused UBS of hiding the true risk of the securities, which were sold to investors in 2006 and 2007 before the housing market collapse.  Under the agreement, UBS will partially pay for past losses with a $358 million cash payment, as well as reimburse Assured for 85 percent of all future losses under a collateralized loss sharing reinsurance agreement.

The settlement follows on the heels of other recent payouts that Assured has received related to residential mortgage-backed securities misrepresentations.  Assured won more than $90.1 million in February 2013 in its contract suit against Flagstar Bank FSB and received a $1.1 billion cash payment from Bank of America Corp. in April 2011 to resolve claims involving 29 first- and second-lien residential mortgage-backed securities trusts. The agreement settles all claims of Assured against UBS. (“UBS Pays $358M to Settle Assured’s RMBS Suit,” Law360, May 6, 2013)

 

Government and Regulatory Intervention

 

Senate Introduces “Too Big To Fail” Legislation for Dodd-Frank

A bipartisan bill, introduced by Sens. Sherrod Brown (D-OH) and David Vitter (R-LA), was unveiled in the Senate recently to supplement the Dodd-Frank Act and help with financial reform.  The bill’s two sponsors believe that the legislation will fix certain flaws not addressed by Dodd-Frank.  Specifically, the largest banks, with more than $500 billion in assets, would be required to have 15 percent of their capital on hand in order to help reduce the risk of a crisis necessitating a federal government bailout.  Midsize banks, encompassing those with $50 billion to $500 billion in assets, must have 8 percent of their capital available under the new bill.

Brown and Vitter say the legislation is an attempt to limit and protect against a taxpayer bailout while leveling the playing field for all financial institutions by removing subsidies for the larger banks.  Opponents argue that the bill will reduce growth for regional banks by capping them at a $500 billion threshold in order to avoid the 15 percent capital requirement.

One of the key opponents is Sen. Tim Johnson (D-SD), who is the chair of the Senate Banking Committee.  He believes regulators should finish the work still needed to be completed on Dodd-Frank, which alone may solve the “too big to fail” issue.  Financial analysts do not believe that this new bill has enough traction to pass in Congress just yet.  (“Too-Big-to-Fail Bill Pitched as Fix for Dodd-Frank Act’s Flaws,” Bloomberg, April 24, 2013)

Congress Voting to Limit Dodd-Frank Swap Regulations

 

Members of Congress renewed their campaign to urge regulators to limit the derivative requirements promulgated under the Dodd-Frank Act, saying the rules are overreaching.  The House Financial Services Committee plans to vote on nine new legislative measures that would allow more swap trades to be unregulated.  Treasury Secretary Jacob Lew disagrees with any new measures, calling any legislation premature, disruptive and harmful.  Rather, he believes the committee should allow for regulators to complete implementing Dodd-Frank regulations before the Legislature determines what additional rules need to be enacted.  Previous legislation attempting to amend Dodd-Frank has failed to pass in the House of Representatives.  (“Swap Regulators Face Congressional Push to Curb Dodd-Frank,” Bloomberg, May 7, 2013)

Bernanke Acknowledges Analysis of Nonbank Financial Institutions

According to Chair Ben Bernanke, the Federal Reserve (the Fed) has in recent years increased its oversight of nonbank financial institutions.  On May 10, 2013, while at a banking conference in Chicago, Bernanke stated that the Fed is conducting stress tests on banks, tracking credit availability among nonbank financial institutions, and monitoring the general financial stability of households and businesses.

However, Bernanke acknowledged that risks remain in the “shadow banking” system, which sits outside the traditional banking structure, such as the securitized subprime mortgages that contributed to the 2008 subprime mortgage crisis.  Bernanke acknowledged that the Fed may not always be able to take preemptive steps to avert another financial crisis; however, the Fed is using its broad oversight in an attempt to focus on preventing another financial crisis within the nation’s banking system by identifying vulnerabilities.  (“Bernanke:  ‘Shadow Banking,’ Other Financial Sectors Still Pose Risks,” The Washington Post, May 10, 2013)