Did you hear the one about Goldman Sachs selling investors mortgage-backed securities that plummeted in value soon after?
By chance you haven’t the National Credit Union Administration, an independent federal agency that regulates federal credit unions, is suing Goldman Sachs on that allegation and is seeking $491 million in damages.
NCUA’s new suit against Goldman Sachs claims the sellers and underwriters of the questionable securities made numerous material misrepresentations in the offering documents. These misrepresentations caused the corporate credit unions to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering five corporates insolvent. The combined suits are the culmination of lengthy investigations into the circumstances surrounding the purchases of these securities.
If the allegations sound familiar that’s because Goldman settled somewhat similar claims with the SEC last summer for a record $550 million. In that case the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed which hinged on the performance of subprime residential mortgage-backed securities.
The NCUA claims that the sale of those securities brought down the now-failed U.S. Central and Western Corporate federal credit unions.
Goldman Sachs would not comment on the suit.
“NCUA continues to carry out our responsibility to do everything reasonable in our power to seek maximum recoveries,” said NCUA Board Chairman Debbie Matz. “By these actions we intend to hold responsible parties accountable. Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions.”
Goldman is the latest firm being sued by the NCUA’s over the matter. It’s already sued JPMorgan Chase and RBS Securties over similar claims. The federal regulator says it expects to file another 5 to 10 lawsuits in order to recover assets that were lost when five now-failed federal credit agencies bought these securities.
In its quarterly regulatory filing today Goldman named the National Credit Union Administration as a possible plaintiff in upcoming legal battles over mortgage securities. From Goldman’s 10-Q:
Certain of these complaints also name other firms as defendants. A number of other entities (including the National Credit Union Administration, the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Allstate Insurance Company, John Hancock and related parties and American International Group, Inc. (AIG)) have threatened to assert claims against the firm in connection with various mortgage-related offerings, and the firm has entered into agreements with a number of these entities to toll the relevant statute of limitations.
The NCUA’s suit is the latest against a major Wall Street firm related to the sale of mortgage securities. Yesterday AIG sued Bank of America seeking to recover more than $10 billion on investments in mortgage-backed securities.
Goldman Sachs shares closed up at $122.73 after dropping to $112 earlier this afternoon.
Read the NCUA’s complaint filed today in a Los Angeles federal court (attached).