Orrick's Financial Industry Week in Review - April 14, 2014

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

Agencies Apply Increased Leverage Ratio to Large U.S. Banks

On April 8, the Fed, FDIC and OCC adopted the final rule to increase the leverage ratio for the largest U.S. banks.  The final rule applies to U.S. bank holding companies with more than US$700 billion in consolidated total assets or more than US$10 trillion in assets under custody and their insured depository institution subsidiaries.  Covered banking organizations must maintain a leverage buffer of 5 percent.  Insured depository institution subsidiaries must maintain 6 percent leverage ratio.  The final rule has the effective date of January 1, 2018.   FDIC Press Release.  Fed Press ReleaseFDIC Rule.   

Agencies Issue Supplementary Leverage Ratio Proposed Rule

On April 8, the Fed, FDIC and OCC issued notice of proposed rulemaking that would modify the denominator calculation for the supplementary leverage ratio in compliance with the Basel Committee on Banking Supervision agreements.  The revisions will apply to all internationally active banking organizations.  Comments must be submitted by June 13, 2014FDIC Press ReleaseFed Press ReleaseFDIC Rule.   

Fed Gives Two-Year Extension to Banks to Conform to Certain Aspects of the Volker Rule

On April 7, the Fed announced that it intends to give banking entities two additional one-year extensions to conform their ownership interests in and sponsorship of certain collateralized loan obligations to the Volker Rule.  The Fed previously extended the deadline for all activities and investments by one year to July 21, 2015.  The Fed intends to grant banking entities two additional one-year extensions, which together would extend until July 21, 2017Fed ReleaseFed Statement.  

SEC Launches Cooperation Initiative to Encourage Municipal Issuers and Underwriters to Self-Report Continuing Disclosure Violations

On March 10, the SEC announced that issuers and underwriters of municipal securities may voluntarily report materially inaccurate statements made in offering documents regarding prior continuing disclosure compliance through a program called the Municipalities Continuing Disclosure Cooperation Initiative (the MCDC Initiative).  Orrick covered the topic extensively in a recent client alert.  

Rating Agency Developments

On April 10, Moody's released its methodology for rating for privately-financed public infrastructure projectsMoody's Report.

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

Distressed Debt and Restructuring Developments

Bankruptcy Judge Approves Detroit Swaps Deal with Banks; Detroit Reaches Settlement with Bond Insurers

On April 11, Bankruptcy Judge Stephen Rhodes approved a proposed US$85 million settlement with banks that were counterparties to a disputed US$286 million swap with the City of Detroit.  The Judge had previously rejected prior settlements at US$230 million and US$165 million in December and January respectively.  In his statements from the bench approving the revised settlement, Judge Rhodes expressly stated that he believed a cramdown plan could be approved as a result of this settlement.  Cramdown in bankruptcy requires, among other things, one impaired consenting class of creditors, and the Judge's statement suggests that he believes the swap counterparties suffice to satisfy this standard.  The court has not yet submitted a written order.

Earlier last week, mediators in the Detroit bankruptcy (including Chief District Court Judge Rosen) announced that the City and three monoline insurers (National Public Finance Guarantee Corp., Ambac Assurance Corp. and Assured Guaranty Municipal Corp.) had reached a deal to settle claims regarding US$388 million in unlimited tax general obligations bonds.  The parties agreed to reinstate 74 percent of the GO bonds for the benefit of the lenders.  The proposed plan will designate the remaining 26 percent of the relevant bonds for the benefit of certain pension beneficiaries.  The monolines agreed to keep the current insurance policies outstanding around these GO bonds.  The City also agreed to include in their proposed confirmation order approving the plan, findings that the tax millage pledged to repay these bonds constitutes a "special revenue" under section 902 of the Bankruptcy Code and that such amounts be subject to a statutory lien.  The city also agreed that the new bonds will be secured by a fourth lien on distributable state aid going forward.

The net effect of these settlements could be to advance the city toward a proposed plan of restructuring.  The pressure of a potential cramdown could move other parties to reach settlements with respect to their claims in advance of confirmation hearings slated for mid-to-late July.  Audio of RulingStatement.

RMBS and Other Securities Litigation

Citigroup Announces Settlement of Repurchase Claims

On April 7, Citigroup announced an agreement to settle repurchase claims brought by 18 institutional investors in 68 RMBS trusts for US$1.13 billion.  The settlement covers US$59.4 billion in RMBS transactions issued between 2005 and 2008.  The settlement agreement is subject to approval by the trustees for the RMBS trusts and does not cover potential regulatory actions or claims for misstatements in securities offering documents.  Press Release.    

FHFA Repurchase Suit Against DB Structured Products Dismissed

On April 10, Justice Bransten of the Supreme Court of the State of New York dismissed the Federal Housing Finance Agency's US$1.4 billion suit against Deutsche Bank Structured Products.  FHFA initially filed the suit on behalf of Freddie Mac as a certificateholder for breach of contract in connection with repurchase claims.  After the six-year limitations period on breach of contract claims expired, the trustee joined the action.  The court held that FHFA lacked standing to enforce the contractual repurchase remedy and dismissed the claims as time-barred under the December 2013 decision of the First Department in ACEOrder.   

Federal Court Dismisses Repurchase Suit Against Citigroup in Part

On March 31, Judge George B. Daniels of the United States District Court for the Southern District of New York partially dismissed a repurchase suit against Citigroup.  The plaintiff-trust alleges breaches of representations and warranties in connection with an April 2007 securitization of a pool of 4,946 residential mortgage loans.  The court dismissed the claims as to loans that the trustee had not requested Citigroup repurchase before bringing suit and dismissed plaintiff's claim for damages as barred by the contractual sole remedy provision.  The court declined to dismiss plaintiff's breach of contract claims as time-barred, holding that they accrued on the Closing Date of the transaction, and were brought within six years of that date.  The court also denied Citigroup's motion to dismiss plaintiff's claim for indemnification.  Order.   

Trustee Repurchase Suit Against GreenPoint To Proceed

On March 31, Judge Andrew Carter of the United States District Court for the Southern District of New York denied Greenpoint's motion to dismiss the complaint filed by trustee U.S. Bank National Association.  The court held that the accrual provision in the Mortgage Loan Purchase Agreement could not extend the statute of limitations, but nonetheless held that the trustee's claims were timely because they were brought within six years of the Closing Date of the transaction.  The court denied GreenPoint's motion to dismiss the trustee's claim for indemnification, rejecting the argument that the indemnity was limited to third party claims.  The court also declined to dismiss the complaint for failure to provide adequate notice of breaches, concluding that this raised factual issues.  Order.   

Allstate and Merrill Lynch Agree to End RMBS Suit

On April 8, Allstate Insurance Company and Merrill Lynch & Co. filed a stipulation to discontinue a suit for more than US$167.4 million in residential mortgage backed securities.  Allstate filed suit in 2011 in the Supreme Court for the State of New York, alleging fraud by Merrill Lynch in the sale of the securities to Allstate.  It alleged misstatements in offering documents related to underwriting guidelines, due diligence, owner occupancy, loan-to-value ratios, exceptions, credit ratings, and credit enhancement features.  Allstate had brought claims under New York law for fraud, fraudulent inducement, and negligent misrepresentation and claims for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  Stipulated DiscontinuanceComplaint.


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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