An arm of the US government is suing Royal Bank of Scotland, majority owned by the British taxpayer, over more than half a billion dollars of its mortgage bonds that went sour during the credit crisis.
In a lawsuit filed last night in a federal court in Kansas, the National Credit Union Administration (NCUA), which regulates the small American banks known as credit unions, said faulty mortgage bonds sold by RBS were partly to blame for the collapse of five of the largest credit unions.
The lawsuit is the first in what the NCUA says will be a series of actions against the biggest players on Wall Street. Also last night it filed suit against JPMorgan Chase, the US financial giant, and it is expectedto sue up to 15 Wall Street banks.
The organisation's chairman, Debbie Matz, 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 responsible for taking over and selling off the assets of failed credit unions, but has been saddled with the near-worthless mortgage bonds that one credit union, US Central, bought from RBS in 2006.
In total, US Central paid $565m for two dozen different investments, all of which had been given a gold-plated AAA credit rating, the highest possible. Yet within months, the borrowers of the underlying mortgages had begun to default on their loans, and without the expected cashflows the bonds began to collapse. They are now rated as junk.
Investors lost hundreds of billions of dollars when residential mortgage-backed securities (RMBS) of the type sold by RBS turned out to be dud investments. The resulting chaos in the banking system led to a full-on financial market panic in 2008, and RBS was among the casualties. It was nationalised by the UK Government, which now owns 84 per cent of the company.
The NCUA alleges that RBS's offering documents for each of these investments contained misleading statements and failed to mention important information. The lawsuit does not accuse RBS of fraud, only of being legally responsible for US Central's losses in its role as underwriter of the bonds.
The lawsuit also names more than a dozen of the lenders who owned the underlying mortgages, known as "originators", a number of which are now defunct.
"In fact, the originators had systematically abandoned the stated underwriting guidelines in the offering documents," the Kansas lawsuit alleges. "A material percentage of the borrowers whose mortgages comprised the RMBS were all but certain to become delinquent or default shortly after origination. As a result, the RMBS were destined from inception to perform poorly."
The lawsuit demands recompense for damages and costs. "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," it says.
RBS declined to comment last night.Reuse content