FHFA Squares Off With Firms at Trial
Agency says Nomura Holdings sold Fannie and Freddie mortgage securities rife with errors and misrepresentations
Lawyers for the Federal Housing Finance Agency say Nomura Holdings sold Fannie and Freddie mortgage securities that were rife with errors. PHOTO: REUTERS
By JOE LIGHT
March 16, 2015 5:00 p.m. ET
Lawyers for the U.S. government said Nomura Holdings Inc. executives knowingly sold mortgage-finance companies Fannie Mae and Freddie Mac securities that were rife with errors and misrepresentations, kicking off opening arguments in a $1.1 billion civil lawsuit in New York.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, is bringing the suit against Tokyo-based Nomura and co-defendant Royal Bank of Scotland Group PLC.
The banks are two of 18 financial institutions, including Bank of America Corp. and Goldman Sachs Group Inc., targeted by the FHFA in 2011 with lawsuits that so far have garnered about $18 billion in settlements.
The outcome of the trial, which is taking place in Manhattan federal court and is expected to last into April, will signal the wisdom or folly of the banks that settled rather than fight the government in court.
The cases center on mortgage-backed securities that Freddie and Fannie invested in during the housing boom. The investments were separate from Fannie’s and Freddie’s usual business of securitizing and guaranteeing repayment on mortgage loans.
Although investments in such securities bolstered the companies’ profits for a time, they lost billions of dollars in value during the real-estate crisis.
The companies were put into conservatorship by the government in 2008 and received almost $188 billion in bailout money.
The FHFA argues that the securities’ offering documents were inaccurate. In some cases, the FHFA said, the loans behind the securities were for homes with values at far less than purported. In others, the loans didn’t go to owner-occupants as had been claimed, the agency said.
In his opening statement on Monday, Philippe Selendy, a lawyer for Quinn Emanuel Urquhart & Sullivan LLP, which is representing the FHFA, said Nomura and RBS were “willing participants in creating the worst financial crisis since the Great Depression” in lying about the quality of the securities they sold.
David Tulchin, an attorney for Sullivan & Cromwell LLP, which is representing Nomura, said the company adequately disclosed in securities’ offering documents that there could be mistakes. He also attacked government attempts after the fact to value the loans and homes tied to them, calling the methods “litigation driven.”
Instead, Mr. Tulchin said, losses on the securities were due to the housing crisis and weren’t Nomura’s fault.
The Nomura case is notable for reaching trial at all. Only one other case, a separate one against RBS in Connecticut, hasn’t settled.
Some analysts have said Nomura and Edinburgh, Scotland-based RBS might be more willing to fight the government because they are less concerned about the risks of damaging their reputations in the U.S.
“The banks that settled decided that closing the chapter on the government’s crisis-era claims was worth the upfront expense of a settlement when considered in the context of both actual and reputational cost,” said Isaac Boltansky, an analyst with Compass Point Research & Trading LLC in Washington.
Settlements from the securities cases, and other crisis-related penalties, for the past couple of years have been a significant source of profits for Fannie and Freddie.
At the trial, Thomas Rice, a lawyer with Simpson Thacher & Bartlett LLP representing RBS, said Fannie’s and Freddie’s expertise in the mortgage industry belied the notion that they weren’t aware of the risks and potential problems of the securities they invested in.
“These are the largest, most sophisticated players in the market,” Mr. Rice said.
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