RBS in the Dock over Bad Mortgages

by Mark Johnston

During the credit crisis over half a billion dollars of mortgage bonds went sour resulting in the UK governments bail out of the Royal Bank of Scotland group. The group is now majority owned by the UK government and ultimately the British Taxpayer.

A arm of the US Government is now suing the Royal Bank of Scotland for the mortgage deals that went bad. In a lawsuit filed in Kansas, in a Federal Court, the National Credit Union Administration (NCUA) is arguing that mortgage bonds sold by RBS were partly to blame for the collapse of up to five of the largest credit union. The NCUA is the body that regulates all the small US Banks, commonly known as credit unions.

The NCUA says that this is just the beginning of a long series of lawsuits it intends to raise against the big players on Wall Street. JPMorgan Chase and up to 15 Wall Street Banks are in the firing line.

Debbie Matz, chairperson to the NCUA said “NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions. Those who caused the problems in the corporate credit union system should pay for the losses.”

The NCUA is accountable for taking and selling on the assets from failed credit unions. In 2006, US Central bought mortgage bonds from RBS that turned out to be nearly worthless. The total amount paid by US Central was near $565 million for a couple dozen investments but within a couple months the borrowers within the mortgages bought had begun to default on their loans. The couple dozen investments had been given a AAA credit rating, the highest possible before the purchase. As the underlying mortgages began to default and the cash flow from the investments began to fail, the entire investments began to collapse, leading to the whole package investments being rated as junk.

The investors in the residential mortgage backed securities lost hundreds of billions of dollars when the investments turned out to be less than sound. This was one of the factors leading to a full scale collapse of the banking system, of which RBS was a casualty. The RBS group failed and was bailed out by the UK government and is now about 84 per cent owned by the UK taxpayers.

The court case centres around the details held in the investment documentation. NCUA claim that the documentation offered by RBS contained misleading statements and that RBS failed to include key pieces of information. There is no accusation of fraud but there is a liable case for the losses uncured as a result of underwriting the bonds.

Comments from US Central -“If US Central had known about the originators’ pervasive disregard of underwriting standards – contrary to the representations in the offering documents – US Central would not have purchased the certificates,” RBS have declined to comment.

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