Legal panic

6 September 2011 By Agnes T. Crane

The latest U.S. regulatory assault for mis-selling mortgage securities has dragged down bank stocks. But damages previously sought from UBS, and the performance of the underlying loans, suggest the impact of this particular banking nasty is now more than priced in.

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The U.S. Federal Housing Finance Agency (FHFA) on Sept 2 sued 17 financial institutions which, it alleges, mis-sold $196 billion worth of securities to Fannie Mae and Freddie Mac.

The FHFA was established amidst the financial crisis as “conservator” for the two entities, which invest in and guarantee American mortgages worth trillions of dollars. The pair were bailed out by the U.S. government, which has spent $170 billion in an attempt to keep the pair solvent after they lost billions as American house prices collapsed.

The FHFA sued UBS over alleged mis-selling of $4.5 billion of mortgage bonds in July. UBS revealed in its second quarter financial report in July that it faces demands from a counterparty - believed to be the FHFA - amounting to $900m, or 20 percent of the par value of the affected loans.

The FHFA’s latest suits were filed shortly before a three-year deadline for filing lawsuits over the bonds runs out.

On Sept. 5, shares in the six affected European banks all fell sharply. RBS, with the biggest pool of bonds among affected European banks, fell 12.32 percent, to 21.8 pence, Deutsche Bank fell 8.86 percent, to 23.715 euros, Credit Suisse was off 8.13 percent at 19.99 Swiss francs, HSBC dipped 3.81 percent to 505 pence, Barclays tumbled 6.7 percent, to 157 pence, and Societe Generale fell 8.64 percent to 20.25 euros.

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