WASHINGTON/NEW YORK Regulators are pressuring Wall Street banks to cough up $50 billion, accusing them of selling credit unions bad mortgage-related securities, according to a source familiar with the situation.
The National Credit Union Administration, which took over five big credit unions that collapsed amid the financial crisis, is considering filing suit against big banks for misrepresenting risky securities, said the source, who was not authorized to speak on the record.
"It certainly is a serious threat," said Kevin Petrasic, a banking lawyer at Paul Hastings and former special counsel at the U.S. Office of Thrift Supervision.
"The precedential impact raises implications for whether the FDIC (Federal Deposit Insurance Corp) may take similar action going forward, as well as other folks that purchased various securities," he added.
Goldman Sachs, one of the banks that did deals for the biggest credit unions, warned investors in a regulatory filing last month that the NCUA, a government agency, "intends to pursue" claims that Goldman documents were laden with untrue statements about mortgage-related offerings.
The NCUA is also mulling action against Bank of America Corp, JPMorgan Chase & Co and Citigroup Inc, according to the source.
An NCUA spokesman said he could not comment on pending legal matters.
In the heat of the financial crisis, the agency took over five corporate credit unions, including Kansas-based U.S. Central Federal Credit Union and California-based Western Corporate. At the time, the five institutions had mortgage-backed securities valued at about $50 billion.
"You're talking about a lot of money, and it could be a painful settlement," said one bank investor.
Still, misrepresentation of securities is difficult to prove, as it requires getting into the minds of the accused and proving what they knew and should have known, according to lawyers and analysts.
Banks' representation of securities has created a "mounting problem" for the industry, said Cornelius Hurley, a professor and director of Boston University's Morin Center for Banking and Financial Law.
"They're talking about some fairly large numbers, but it's hard to gauge the merits of their claim" without knowing the details, Hurley said.
The NCUA's inspector general said in a November 2010 report that had the agency's examiners acted more aggressively, "the looming safety and soundness concerns that were present early on in nearly every failed institution could have been identified sooner and the eventual losses to the (the agency's insurance fund) could have been stopped or mitigated."
(Edited by John Wallace)