Journal: NCUA Seeking $50B from Big Investment Banks (Misc News: March 23, 2011)
The NCUA is going after several investment banks that sold mortgage-backed securities to the five failed corporate credit unions, The Wall Street Journal reported Wednesday.
Quoting “people familiar with the situation,” the Journal article says that the agency wants to recoup $50 billion from Goldman Sachs Group Inc., Bank of America Corp.'s Merrill Lynch unit, Citigroup Inc. and J.P. Morgan Chase & Co. Regulators accuse the banks of misrepresenting the risks to wholesale credit unions, which loaded up on the bonds in their role of investing on behalf of retail credit unions, according to people familiar with the situation.
The NCUA seized the five wholesale credit unions in 2009 and 2010, inheriting a pile of battered bonds now worth only about $25 billion, or half of their face value.
Many of the hundreds of bonds inherited by the NCUA in its rescues of wholesale credit unions were loaded with subprime mortgages, interest-only loans or mortgages with other risky characteristics such as not requiring income verification.
The mortgage-backed securities often carried Triple-A credit ratings at first. Many now have junk ratings.
According to people familiar with the matter, agency officials recently issued an ultimatum to several firms that sold the bonds: Either refund every dollar spent to buy the bonds when they were issued or face lawsuits seeking to recover the money.
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The NCUA conserved the five corporates in 2009 and 2010, taking over more than $50 billion in mortgage-backed bonds from the failed credit unions. Last fall, the agency started selling bonds backed by those assets with a government guarantee. The rescue created four new corporate credit unions, but retail credit unions must pay assessments to rebuild the industry's insurance fund, so losses on the bonds will be passed on to retail credit unions.