Royal Bank of Scotland, Barclays and HSBC were among 17 giant banks sued last night by a US government agency, seeking billions of dollars in compensation over their packaging and selling of mortgage bonds in the run-up to the credit crisis.
The Federal Housing Finance Agency (FHFA) lawsuits also personally named 13 US-based executives who worked in the UK banks' mortgage divisions.
US giants such as Bank of America, JPMorgan Chase and Goldman Sachs, as well as Deutsche Bank, Credit Suisse and Société Générale also received lawsuits.
The FHFA oversees Fannie Mae and Freddie Mac, the US mortgage finance giants that had to be nationalised in 2008 after they guaranteed billions of dollars of toxic bonds backed by mortgages that went into default. They lost more than $30bn (£18.5bn) and their liabilities have been taken over by the US taxpayer.
The suits claim that at the height of the US housing bubble the 17 banks failed to run checks required by US securities laws and missed evidence that borrowers had misrepresented their incomes when they parcelled up mortgages for sale as bonds.
RBS was one of the biggest operators in packaging and selling on securities backed by US sub-prime mortgages – a business whose implosion sparked the financial crisis – and the losses in that division were among the reasons it had to be taken over by the British Government.
When mortgage borrowers, tempted by low teaser rates, found themselves unable to repay their loans from 2007 onwards, the value of mortgage securities collapsed.
In July, the FHFA sued the Swiss bank UBS for at least $900m for its activities as a big packager – or securitiser – of US mortgages, and the latest lawsuits are in a similar mould.
"Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings," the agency said last night.
RBS and Barclays already face litigation in the US by the trustee for Thornburg Mortgage Inc, a bankrupt US lender. In May the court-appointed trustee for Thornburg listed the UK banks among those responsible for the mortgage lender's failure.
By the time the housing bubble reached its peak, HSBC had reined in its securitisation of US mortgages and suffered huge losses on mortgages it had itself written at its Household US operation.
The FHFA was given three years from September 2008, when Fannie Mae and Freddie Mac were nationalised, to bring certain claims based on alleged past wrongdoing. The lawsuits were filed late yesterday in courts in New York and Connecticut, and the banks are likely to fight them vigorously. Deutsche Bank, one of the first to react, said: "Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more."
The litigation could place further costs and uncertainty on the US banking system. In particular, speculation about the suits added to pressure on Bank of America, the biggest US bank, whose shares slumped 8 per cent yesterday on concerns over potential losses from its huge mortgage book.
Barclays case may aid British investors
*Lawyers for British investors claiming about £12m from Barclays over losses in Bernard Madoff's funds say their clients' cases could be aided by a $67.4m (£41.5m) lawsuit filed against the bank by the trustee of the US fraudster's fund management firm.
The UK bank is one of six financial firms sued in the US on Thursday by the trustee, Irving Picard, who is trying to recover money transferred out of Madoff's $65bn Ponzi scheme.
All the US lawsuits involve Fairfield Sentry, a Madoff feeder fund. Barclays Wealth faces claims in the UK from clients who say they were wrongly advised to invest in Fairfield Sentry.
David Greene, a partner at Edwin Coe, which acts for claimants against Barclays, said: "Any action by the trustee may greatly assist people who received Barclays' advice to invest in Fairfield Sentry. One of the issues they raise is what Barclays did or should have realised about Madoff's activities and the trustee's case may lay bare that information."
In March, the bank was criticised by the UK Financial Ombudsman for "wholly inappropriate" advice given to a client to invest in Fairfield Sentry and was ordered to repay him £100,000.
Barclays declined to comment on the trustee's lawsuit.