Coverage: RBS and Nomura misled Fannie and Freddie

Fannie Mae and Freddie Mac won a victory in court Monday after a judge ruled that Nomura and Royal Bank of Scotland misled them about what was in mortgage securities.

Bob Van Voris had these details in his story for Bloomberg:

Nomura Holdings Inc. and Royal Bank of Scotland Group Plc may face $500 million in damages for what a judge called an “enormous” deception in the sale of defective mortgage-backed securities, a ruling that may spur other banks to settle similar claims tied to the 2008 financial crisis.

Nomura and RBS were excoriated in a 361-page opinion by U.S. District Judge Denise Cote in Manhattan, whose ruling followed the first trial of claims that banks sold flawed securities to government-owned mortgage companies. After a three-week trial, Cote said they misled Fannie Mae and Freddie Mac and set a damages formula that may result in the government winning about half its original claim of $1 billion.

“The offering documents did not correctly describe the mortgage loans,” Cote, who heard the case without a jury, wrote Monday. “The magnitude of falsity, conservatively measured, is enormous.”

Before the trial, FHFA had reached $17.9 billion in settlements with other banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. The ruling against Nomura and RBS may encourage other banks to settle mortgage-related suits brought by regulators and private investors rather than face the bad publicity and cost of an adverse judgment, said Robert C. Hockett, a professor at Cornell Law School.

The Wall Street Journal story by Joe Light said that Nomura planned to appeal the judge’s decision:

During the boom, Fannie and Freddie invested billions of dollars in mortgage-backed securities issued by such companies as Nomura. Those investments bolstered profits but, in the bust, contributed to steep losses that ultimately resulted in the companies’ 2008 government takeover.

Nomura and RBS were two of 18 financial institutions, including Bank of America Corp. and Goldman Sachs Group Inc., targeted in 2011 by the FHFA, which alleged that the companies lied about the quality of the loans underlying the securities. During the nonjury trial, lawyers for the FHFA said that Nomura and RBS inflated values of homes behind some mortgages and sometimes said a home was owner-occupied when it wasn’t.

Nomura and RBS became the first defendants to take their case all the way to trial. A separate case against the Royal Bank of Scotland Group PLC in Connecticut is ongoing.

A Nomura spokesman said the bank would appeal.

“Nomura is confident that it was consistently candid, transparent and professional in all of its dealings with Fannie Mae and Freddie Mac and looks forward to bringing its case to the U.S. Court of Appeals,” said the spokesman.

The Financial Times story by Tom Braithwaite said that FHFA was happy with the decision, and highlighted the internal emails at the banks as evidence of wrongdoing:

Alfred Pollard, general counsel of the FHFA, said the agency was “pleased with the court’s decision” and looked “forward to submitting proposed damages”. The FHFA had originally sought $1.1bn from Nomura and RBS.

During the trial, the FHFA pointed to internal emails sent at the banks, with employees describing the quality of loans underpinning the securities. “Danger Batman!” wrote one Nomura employee. Another said loans included in a security were “crap”.

“What we have seen at Nomura and RBS can only be described as colossal incompetence, ignorance and deceit,” said Philippe Selendy, a lawyer for Quinn Emanuel, representing the FHFA.

RBS was an underwriter on some of the securities at question in this case but it is due to fight a separate case, with a much larger potential pricetag, in a separate court.

Peter Eavis wrote for The New York Times that several of the government’s best wins in relation to the financial crisis had come from the housing agency:

The government, under pressure to hold Wall Street accountable after the crisis, has pursued a wide range of actions against domestic and foreign banks. Agencies including the Justice Department and the Securities and Exchange Commission have reached multibillion settlements.

But some of the government’s biggest wins — including its victory on Monday — have come from an unlikely source: the Federal Housing Finance Agency, a relatively obscure Washington entity set up to oversee Fannie Mae and Freddie Mac, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008.

The agency’s lawyers have aggressively pursued the banks, helping the government secure big-dollar settlements. But unlike the relatively opaque settlements, the trial against Nomura and R.B.S. opened a window into the behavior of banks heavily involved in subprime mortgages at the peak of the housing boom.

It’s yet another legal issue hanging over the banks. The remaining firms will likely turn to a settlement in order to avoid the headlines of a trial, but it’s yet another hit for investors to absorb. I’m sure that many are wondering when the fallout from the financial crisis will end.