Orrick's Financial Industry Week in Review - August 18, 2014

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

FHFA Seeks Input on Single Security Structure for Fannie Mae and Freddie Mac

On August 12, FHFA published a Request for Input on the proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac.  The FHFA identified as its goal improving the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities by creating a Single Security that is eligible for trading in the to-be-announced market.  ReleaseRequest for Input

Rating Agency Developments

On August 14, Fitch updated its criteria for unique or complex transactions requiring an interdisciplinary review.  Report.

On August 14, S&P published a request for comment on proposed changes to its methodology and assumptions used to rate U.S. RMBS servicer advance securitizationsReport.

On August 13, S&P published a request for comment on its proposed framework for rating nonbank financial institutions globally.  Report.

On August 13, S&P updated its criteria for rating debtor-in-possession financingReport.

On August 12, S&P published a request for comment on its proposed changes to its methodology for rating mortgage insurers, specifically on the proposed key credit factors for the mortgage insurance industry, and a second request for comment on its proposed criteria for analyzing capital adequacy for the mortgage insurance sector.  Comments on either proposal must be submitted by September 30, 2014.  Methodology RequestCriteria Request.

On August 12, Fitch updated its criteria and model for sovereign ratingsReport.

On August 8, Fitch updated it methodology for rating insurance-linked securitiesReport.

On August 8, Moody's released its rating methodology for global mining companiesReport.

Note: Free registration is required for rating agency releases and reports.

Distressed Debt and Restructuring Developments

The Nationalization of Banco Espirito Santo - The Aftermath

The Bank of Portugal announced on August 3 that it applied its powers under the Decree law No 31/2012 of February 10, 2012, to split Banco Espirito Santo into a "good bank" and "bad bank"  and to transfer certain of BES "good" assets and liabilities to "Novo Bank." To read the complete Orrick alert, please click here

RMBS and Other Securities Litigation

New Suit Filed Alleging RMBS Trustee Failures by Bank of NY Mellon

On August 14, Royal Park Investments SA/NV, an entity formed to pursue legal claims on behalf of a Belgian bank that collapsed in the financial crisis (Fortis Bank NA/SV), filed a putative class action complaint in the U.S. District Court for the Southern District of New York against Bank of New York Mellon, as trustee of certain RMBS securitization trusts.  Royal Park alleges violations of the Trust Indenture Act and common law claims for breach of contract and trust based on, inter alia, the trustee's alleged failure to protect investors against defective loans and loan servicing failures.  Royal Park has previously filed similar complaints against units of Deutsche Bank and U.S. Bank in their capacity as RMBS trustees. Complaint.    

Morgan Stanley's Bid to Dismiss RMBS Repurchase Action Is Denied

On August 8, Justice Eileen Bransten of the Supreme Court for the State of New York largely denied Morgan Stanley Mortgage Capital's (Morgan Stanley) motion to dismiss a lawsuit brought by plaintiff U.S. Bank, N.A., as trustee for an RMBS trust.  The trustee alleges that Morgan Stanley breached its obligation to repurchase loans that do not comply with certain representations and warranties.  The court held that the plaintiff's breach of contract claims were adequately pleaded as to all allegedly breaching loans in the trust, even though the plaintiff had only notified Morgan Stanley of approximately 3,000 breaching loans prior to suit.  The court dismissed claims for rescission and indemnification, holding that the governing contracts bar such relief and limit the plaintiff to the sole remedy of repurchase. Decision.   

Court Allows Fraud Claim Against Société Générale To Proceed in US$34 Million CDO Suit

On August 5, Justice Melvin L. Schweitzer of the Supreme Court for the State of New York dismissed in part claims against a unit of Société Générale.  Plaintiff Northern Rock, a regional English bank, alleged that Société Générale Corporate and Investment Banking (SGCIB), along with two other defendants (the structurer and the collateral manager), misrepresented the quality of RMBS underlying a collateralized debt obligation.  The plaintiff alleged US$34 million in losses from its purchase of CDO notes and brought claims for common law fraud, breach of contract, unjust enrichment and rescission.  The court allowed the fraud claim to proceed, holding that Northern Rock had adequately pleaded that SGCIB marketed the CDO notes as backed by high grade collateral despite alleged knowledge that the underlying RMBS were rapidly declining in value.  The court dismissed Northern Rock's claim for breach of contract, however, as duplicative of its fraud claim and because the contract itself did not promise specific credit quality.  The court also dismissed Northern Rock's claim for unjust enrichment in light of the existence of a written contract governing Northern Rock's investment.  Finally, the court concluded that money damages could fully compensate Northern Rock and that rescission is not available.  Decision

European Financial Industry Developments

FCA Says Firms Must Do More to Ensure Financial Promotions Do Not Mislead Customers

On August 13, the FCA published a press release warning firms that they need to do more to ensure all financial promotions are clear, fair and not misleading for customers.

Since April 1, 2014, the FCA has reviewed more than 1,500 financial promotions for consumer credit products.  During the same period, the FCA has opened 227 cases about non-compliant promotions for products.  A quarter of the cases relate to advertisements for high-cost short-term credit, with many not prominently displaying a risk warning or representative annual percentage rate of charge.  Press Release

ECB Publishes Comprehensive Stress Test Manual

On August 8, the ECB published a manual detailing how it will incorporate findings from its asset quality review (AQR) into stress test projections.

In an accompanying press release, the ECB explains that the comprehensive assessment is a thorough check of the balance sheets and resilience of the biggest banks before the ECB takes on its supervisory tasks in November 2014.  The ECB's assessment differs from previous EU-wide stress test exercises in that it comprises a thorough asset quality review and includes a "join-up" of the AQR and stress test outcomes.  This enables a more accurate assessment of the bank balance sheet conditions, as well as of credit and other risks on banks' books.

The ECB will publish the final results from the comprehensive assessment in the second half of October 2014.  ManualPress Release


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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