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FHLB-Seattle Sues Wall Street

Posted by Larry Doyle on January 27, 2010 9:54 AM |

When people lose a lot of money, it’s no surprise that they find a lot of lawyers and a lot of reasons to start bringing lawsuits.

Talking about losses, I first introduced readers to the expected red ink within the Federal Home Loan Bank (FHLB) system last May. I wrote “FHLBs: Red Sea, Dead Sea or Both?” and “Freddie Mac, Fannie Mae Deja Vu?” to highlight the embedded losses within the FHLB system. The losses are centered in the massive mortgage portfolios within the system. The toxic waste within a lot of these mortgages is now being realized in terms of actual losses as an ever increasing percentage of the mortgages default. What’s the result? Let’s go to court.

Thank you to a loyal Sense on Cents supporter for highlighting a developing lawsuit. The FHLB-Seattle is effectively suing all of Wall Street. This suit and its underlying roots deserve significant broad based coverage. Why?

1. The FHLB-Seattle suit is directed at almost every Wall Street firm.

2. The suit targets the integrity of the underwriting of the underlying mortgages backing the securities purchased by the bank.

3. The suit addresses the question as to whether loans were fraudulently underwritten and knowingly fraudulently securitized and distributed by Wall Street.

4. This suit should be viewed as a prime reason why credit is not flowing into the economy. Banks in general, the FHLB system in particular, and FHLB-Seattle specifically continue to bleed from losses on existing loans and securities.

5. Of particular interest with this suit is the fact that FHLB-Seattle is a very large Wall Street client across a number of market segments.

This suit deserves front page coverage across every major financial media outlet. Why hasn’t it received the coverage? I’ll let others weigh in with their opinions, but from my perspective this suit strikes at the core of the fraud which occurred within our mortgage industry over the last 3-5 years. The media has shown itself to be challenged in exposing that reality.

The Pittsburgh Business Times is the only outlet I have seen to highlight this multi-billion dollar suit in writing, Federal Home Loan Bank Seeks to Recoup Securities Investment; $3.9 Billion in Mortgage Suits Filed:

The Federal Home Loan Bank of Seattle has filed lawsuits against 11 global financial institutions that sold it nearly $3.9 billion in mortgage-backed securities during the height of the housing market bubble, saying those institutions made false or misleading statements about the quality of the securities.

The Home Loan Bank, part of a network of cooperative institutions that supply money for member banks, wants to recoup at least part of the purchase price, plus interest, of 43 securities it bought between 2006 and 2007, according to the complaints filed in King County Superior Court in Seattle.

The 11 lawsuits, filed late last month, all contain similar allegations and demand jury trials. The Home Loan Bank essentially wants to “rescind” the transactions: It will return the securities for its money back, the complaints say.

The Home Loan Bank is suing Goldman Sachs & Co., Morgan Stanley, Barclays Capital, RBS Securities, UBS Securities, Deutsche Bank Securities, Credit Suisse, Bank of America, Merrill Lynch, Countrywide Financial (both Merrill and Countrywide are now owned by Bank of America), and Bear Stearns, now owned by JPMorgan Chase. All of the banks played a role in packaging up the mortgages into securities and selling them to the Home Loan Bank.

The banks and their new owners have declined comment.

Thanks to our loyal supporter for bringing this case to my attention. It deserves significant coverage if we are ever to achieve real truth, transparency, and integrity in the system.

LD

  • Bill

    Goldman Sachs always seems to invariably
    figure in these sorts of things. I did
    some inquiry awhile back on the FHLB system,
    and as I recall there is an umbrella
    entity that issues the FHLB debt, but all of the individual banks in the system are jointly and
    severally liable on the debt. Thus, if
    one of the banks, e. g. the one in Seattle
    is unable to meet its obligations, the
    others have to take up the slack. Someone
    else may have more info, but that’s my
    recollection. Interesting piece.

  • Patriot

    Looks like Seattle’s investment portfolio is equivalent to hardened arteries….how long can the patient remain alive on his own?

    Plus, if Seattle has these problems what about the other 11 members of the system? Who’s next? Pittsburgh? Chicago? Atlanta? Boston?

    Looks like a tour. Where will this ‘suit’ play out next?

    Good question as to why the WSJ or anybody else hasn’t covered this. What’s up with that?

  • john

    hmmmmmmmmm……watch out darrel!

  • NYbrooklyn

    kudos to the Federal Home Loan Bank
    of Seattle! why should they have to write off all of these ‘unrealized loses’ and toxic assets Wall Street packaged up and gift wrapped! send it back for a full refund! LD, the FHLB Seattle deserves somecredit!

    • LD

      This case is going to be very interesting. I think there are some real merits in the case, but I also think it is going to be very difficult for the FHLB-Seattle to win. Why?

      The prospectuses for these deals are written very carefully and comprehensively. The defendants will drill the FHLB on how much due diligence they did themselves.

      I am not saying that there are not real merits in the case, but merely that it will be tough to prove.






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