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On UBS and the FHFA Lawsuit
The Federal Housing and Finance Authority announced this week that it was suing UBS for mortgage fraud. (I'm shocked!) This is a big deal. The damages being claimed start at $900mm. I find this lawsuit interesting. Some background.
On July 10, 2010 FHFA issued a total of 64 subpoenas to various financial institutions. All of these lawsuits were related to losses that either Fannie or Freddie had incurred as a result of improper mortgages that were sold to the Agencies. UBS is the first formal legal action related to those subpoenas.
Two questions come to my mind. (I) Why UBS? And (II) what are the broader implications of this?
On the why UBS:
Federal prosecutors often push for a trial when the opposition is being uncooperative regarding a settlement. I don’t think this is the case with UBS. While I’m sure that UBS is pushing as hard as they can, I doubt they are the only ones doing so. It is "Un-Swiss" to fight, better to settle.
Federal prosecutors only go to trial when they have a very good case. I think this is the issue. FHFA’s lawyers have drafted a 102-page complaint that has been filed in Federal Court. The brief is very detailed. This is a summary of the charges against UBS.
Note that there are three claims of violations of the 1933 securities act (a big deal). There are also numerous allegations that UBS provided materially false information (also a big deal).
I think UBS is a soft target. This outfit has been ripped to shreds by the Feds over the past few years. In each case UBS’s lawyers folded and UBS paid big mega bucks. So if you were a hotshot federal prosecutor you might tee up UBS first knowing from prior experience that when they are pushed, they crater.
That still does not fully explain why UBS. FHFA’s lawyers have to have a broad battle plan. UBS is the first salvo in that plan. So my guess on why UBS, is that this bank is representative of the other lawsuits that are to follow. When UBS is smashed to pieces in court the other 63 names that got subpoenas will crap in their pants, throw in the towel and write big checks to the FHFA. That would be a good plan to win this war.
So if I’m right and UBS is a stalking horse to get to other big players, where might this lead?
I actually don’t know exactly where this might lead. I tried to find out by contacting the FHFA. I asked if they would provide the other 63 names that are facing big lawsuits. “Nix” was the answer from FHFA. There is no public source of information as to who got the subpoenas. I find that interesting. We have 64 of the biggest names in finance that are being sued for tens of billions of dollars and we have no idea who they are. I think this is material information for investors; it is material information to the public. Why the secrecy?
It’s actually not that hard to figure out who is on the FHFA “target list”. Who are the 64? Everyone, is the answer. It’s hard to miss anyone big when there are so many names involved.
I think that UBS was chosen first in part because they were a middle of the road “bad boy”. They were neither small nor large. Most of the dreck that UBS originated and sold to F/F was originated in 2005 and 2006. The following is a league table for mortgage origination during this period. UBS is mentioned, but note that they are 10% of some of the other players.
This table does not prove much. We will have to see how this works out. My guess is that UBS is the tip of an iceberg. What is behind the UBS suit are monster suits against some of the biggest financial names on the globe.
The press has reported that the UBS suit is about $900mm. That’s only partly correct. FHFA is claiming that they have already suffered losses of $900mm. But that is not a cap on the damages that may be awarded. This is the PRAYER FOR RELIEF section of the court document. (Why do they call it a Prayer?)
Note that FHFA is asking to be compensated for its losses. They want UBS to pay for the legal expenses (astronomical) they want penalty interest at the highest rate the law allows and they also want the dreaded punitive penalties. I’m sure that the UBS lawyers are worried about the $900mm claim, but they have to be very worried about this:
Such other and further relief as the Court may deem just and proper.
If the case goes against UBS the Judge could award anything. A $1.5b total award is not out of the question. Should this happen and we see a big penalty as well as loss compensation, it will scare the life out of the other bankers. One after the other they will fold on this should UBS lose the case.
The UBS/FHFA suit brings another big cloud over the financial players of the world. The question of who is involved and to what extent is a bit of a mystery at this point. The answer is “they” are all dirty, and “they” will be paying big bucks to settle these claims. Just another reason why not to own the financial stocks.
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this might give me some slight hope but then I look around at what a cess pool we have made of the concept of rule of law, saying it just sounds quaint these days....they'll push this til they get a settlement that is good for lawyers and politicians, not taxpayers....
best we can hope for some day is TBTF banks go the way of the Big Tobacco, but it would be a 50 year fight, even if we can find some lawyers and politicians actually willing to fight
Thanks, Bruce for another excellent article. I'm checking out Jan put spreads on UBS this week-end to "balance" out my BCS and DB puts geographically. I brief glance at a chart shows there's about a $4/contract downside so a Jan 16/12 UBS put spread might work nicely-but have to check pricing. Maybe we'll get the FIRE sector down below 10% of GDP in another 10 years if this keeps up. here's hoping.
+100
Now bruce weren't you saying something about the swiss secrecy thing a couple months ago could this be blowback for not complying?
Now bruce weren't you saying something about the swiss secrecy thing a couple months ago could this be blowback for not complying?
Funny how everything comes full circle, or is it a circle jerk with the tax-paying plebes getting screwed like usual. Even if there are big settlements and losses by the banks, you had better believe that the 100s of billions of taxpayer dollars given to Fannie and Freddie are not coming back (got sucked into the leveraged ponzirific black hole), and then for another kick in the teeth, the FED and treasury will just come back with another bailout for the TBTF banks. There is no "winning" in this case. But good article anyway Bruce.
So, let me see, UBS gets slapped by the IRS for holding undeclared accounts, $600M, then UBS gets cash from the Fed as bail out, $700M, and pays banker bonuses. Now, Fannie and Freddie sue UBS for $900M, they will win and give cash to Fannie and Freddie with one hand and take $900M from the Fed with the other, then pay banker bonuses. This is a complete circle jerk - In the end, the IRS fine and the Freddie Fannie judgment gets paid by the Fed with newly printed FRNs, dilluting away Social Security checks. Move along, nothing to see here.
Their dirty lawyers and lobbyists will structure a meaningless "slap on the wrist" settlement which will allow UBS and others to keep 99% of their ill-gotten gains. Expecting justice in a corrupt system is a fool's game.
What he said.
Regardless whether you "believe" in the federal income tax, UBS helped thousands of wealthy US citizens evade billions of dollars of US income taxes.
You know what they say, payback's a bitch.
Did you know that a person born in Somolia, who never travels outside of Somolia, who owns more than $60,000 in Apple stock has a taxable estate - in the United States when he dies?
Did you know that some people can be American citizens without knowing it?
Did you know that a person who inherits a undeclared Swiss account from a US person, who may not be a US person or ever have traveled to the United States, would be liable for taxes in the United States because the person who gave him the money at death failed to disclose?
Did you know that even if you had an offshore account that lost money every year it was opened, and thus there was no income to report, is subject to taxes up to 300% of the account value if it is undeclared. Most folks think - no income, no reporting required.
Did you know one spouse with no knowledge of an offshore account can be held liable for taxes and penalties on the offshore account even if there was no income (especially if they live in a community property state).
Things are not always as clear as they appear. Yes, some folks lied and cheated, but half got caught in the web they did not spin.
Just to present another side:
Maybe they are doing this so the govt can present this before one of the bank-friendly (bought) judges so they can set a precedent allowing all the big fish to get off minimally. We've already seen the gov prosecutors blow cases like this and essentially "lose" the cases (by plan?). Double jeopardy will wipe the slates clean.
My sentiments (almost) exactly.
They might go after them here and there, but ultimately they rule the Ponziticians, as mentioned in this except from a "Naked Capitalism" article :
"But now we see evidence in a new paper by the think tank Third Way of an even deeper commitment to pro-financier policies. The Democratic party has made clear that it supports institutionalized looting by banks, via the innocuous-seemeing device of rejecting the idea of writedowns on bonds they hold.
Policy advisors Lauren Oppenheimer and David Hollingsworth argue that point in the context of Greece, but the exact same logic would apply to banks anywhere. As Michael Hudson has warned:
I thought UBS hired former Senator Phil Gramm to keep them out of a mess like this. After all, he was the guvmint fixer who got the housing fraud going in the first place. Maybe he's retired to Tahiti by now.
UBS was NOT! the Big Guy on the Block. Goldman Sachs, JP Morgan and Citi Banc were 10X's the size of UBS.
Where is Country Wide and thusly Bank of America?
I guess the Lobby Dollars paid to Washington DC are really paying off?
The Banks make NO Money! they are on the hook for Huge Losses in Real Estate! but the Banks still have enough money to pay themselves HUGE Bonuses and to RAIN MONEY down on Washington DC?? that they Borrowed from the Federal Reserve Bank and that "We the People" back stop!
Can you say Bailout, plus higher interest rates because the US has already defaulted? Why are WE! paying for them to rob US Blind??
Yep. When I read, "Where's Countrywide?" I thought the same thing: "Isn't that them hunkering down over there behind Chris Dodd?"
BAC = dead man walking. As i have written before, a NC based bank is out of the loop and will be thrown under the bus in a NY minute.
That is terrible ,I mean how less of a human can you be to cheat with a mortgage scam people out of their saving especially when so many are loosing their homes to the recession. And there are many like this depuy hip recall lawsuit all over the country hundreds of scam artists.
When I read the charges somewhere else I saw that UBS was also being charged with not doing due diligence. Does UBS originate any loans in the US? I find that hard to believe. It looks to me like they bought a lot of liar loans from a US mortgage banker, whipped them up into a CDO and sold it to the FHFA. The question is will they be able to press charges against the originator.
It looks to me like this entire suit probably has little to do with FHFA and everything to do with fiat money, the strong frank, and the IMF. The justice department probably got its orders to turn up the heat on UBS and CS in order to make sure the SNB toes the line and doesn't do anything rash to try to weaken the franc, such as going out and buying loads of gold to take the pressure off of the franc. There could be any number of reasons why the US is cracking the whip.
The lesson for ZHers to take home is that the IMF fiat beast must be fed, and you may enjoy the schadenfreude now but what comes around goes around. It will be UBS and the Swiss who are laughing when you can no longer get any money out of the country and you are forced to buy low interest treasuries with your 401k.
Why would anyone do business with a bank that was a bad guy?
Fascinating. That ought to put some pressure on the Bank Stocks, alright.
100% agreed. get your wife back
When I worked for Bank of America as a short sale POS,
I looked at Countrywide No Income, No Asset loans for people in California/ Arizona/Nevada/ Florida living in $600k houses who made $30k a year. Reason for default? Reduction of income is the fallacy they come up with. In most cases, you see maybe 2 or 5 more houses they also had in a pre-foreclosure position. Remember all those late night tv commercials by Carlton Sheets and Ron Legrande selling classes on how to buy all the houses you wanted at Zero $ Down? Countrywide financed them.
The idiots at BOA are writting these off at 20 cents on the dollar, with Freddie and Fannie and M/i companies taking the hit for this fraud. I hated BOA, they treated us like dirt in the short sales dept, I hope BOA goes broke.
Angelo Mozilo should be corn-holed by that guy from the Green Mile on live TV every market open and close for a year.
Well, attack the weakest, get some money, tell everbody this is a great day for justice and give up trying get the others. Seen that already.
Well, attack the weakest, get some money, tell everbody this is a great day for justice and give up trying get the others. Seen that already.
Bruce - many thanks. Is the reason Countrywide doesn’t show up, that the league tables show the underwriters (the pushers) who packaged the MBS crap and therefore make the relevant reps and warranties about their product, while Countrywide and others (albeit sometimes affiliated with the UWs) were originating the fraudulently toxic filling and assuring the UWs that everything was jake (w/ or w/o a wink, docs to follow)? Also, is “specialty finance” the right league table for MBS - $27B seems on the low side for a year’s issuance, but maybe it’s just that I’ve gotten too used to 100s of billions being bandied about.
A couple of points:
1. Prejudgment interest alone could be well into six figures;
2. If uncle sam can prove violations, then it would seem a civil suit would be a gut lock using the same formula for other transactions;
3. As it stands, punies are good to go for due process purposes at anything less than 10x compensatory damages (although more, depending on the circumstances, might be acceptible);
4. I strongly suspect there are statutory penalties to be had in there also.
In short, I think you're sandbagging the potential for liability.
Suits don't stop fraudulent crime and neither do million dollar fines when the handouts are 800b.
Get a rope.
I'd rather see them rocking the fryer at a Mickey D's in Kentucky for eternity.
Does this mean the UBS CEO gets an Extra $100 Million Performance Bonus? Seems to work that way for the past two years.
I continue to hear Barney Frank claiming fannie and freddie are just fine. "Juth fine I telth you."
Can we add Barney to the law suit.
Yep, the prosecutors are picking the case with the worst facts and then will take the established precedents and try to expand from there. The Lehman estate is adopting a similar strategy and basically in the process rewriting the book on how derivatives agreements are treated in a bankruptcy.
A lot of securities law is not settled, and particularly in structured finance many common practices have not received real legal tests. I understand a lot of people are apt to focus on the money, but IMHO the bigger thing to watch here is the rules of the road that will emerge from these decisions.
how about suing the boards of fanny freddie fha and Rico the
receipients of the PAC money.....
this was well orchestrated, way way way back....
and coordinated FAST and Furiously. IMHO. lol.
UBS is first because they'll be easy to make an example of before they start settlement negotiations with the "bigger fish".
Couldn't UBS just threaten to out all these corrupted mofo's tax dodging accounts and shoo them away ?
Once.
Another great post, Bruce. Who's gonna buy the banks' fargin' dip this time?
I want them to sue BoA and Goldman Sachs and JPM those are the real frauds of the MBS.
At least this will make those fraudsters a little worried, for when they get the knock on the door.
Once again, great work BK
Love the developing graffiti collection.
Cheers
Very optimistic, but realistic???
Two words - failure rewarded.
Another two - record bonuses.
Fucking over the US citizen is great business, expect nothing to come of this slap on the wrist PR blitz. They will all settle for pennies on the pennies guaranteed.