March 2016 - RIP Dodd Frank

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TH E M R EP O RT | 63 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T LOCAL EDITION LOCAL EDITION LOCAL EDITION Virginia Reaches Settlement With 11 Big Banks Over RMBS Fraud Claims SETTLING INSTITUTIONS INCLUDE COUNTRYWIDE, MORGAN STANLEY, AND CITIGROUP, AMONG OTHERS. VIRGINIA // It has now been more than seven years since the housing crisis hit, and settlements over claims of residential mortgage-backed securities (RMBS) are still alive and well. Earlier this year, Goldman Sachs settled for $5.1 billion with the U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration (NCUA), and the Federal Home Loan Banks of Chicago and Seattle. Additionally, the Federal Housing Finance Agency (FHFA) has a lawsuit pending against Royal Bank of Scotland over sales of toxic RMBS to Fannie Mae and Freddie Mac, which some analysts expect will reach a settlement this year in the multibillions. The latest RMBS settlement occurred in Virginia when the Commonwealth's attorney general, Mark R. Herring, announced that 11 financial institutions have agreed to collectively pay more than $63 million to resolve claims that the banks misrepresented the quality of certain RMBS sold to the Virginia Retirement System (VRS). The case is a landmark one for the Commonwealth of Virginia; it is the largest nonhealthcare-related recovery ever obtained in a suit alleging violations of the Virginia Fraud Against Taxpayers Act. "This case breaks new ground for Virginia, recovering millions for Virginia taxpayers from banks that we alleged had misrepresented the products they sold to the Commonwealth," Herring said. "Today's settlement, which represents significant relief to VRS, taxpayers and pensioners of the Commonwealth, is one of the largest of its kind in the nation." The attorney general alleges that the misrepresentation of the quality of the RMBS sold by the 11 financial institutions to the VRS harmed not only the VRS but the taxpayers and pensioners of the Commonwealth. As part of the settlement, the defendants admitted no liability, and the claims were dismissed with prejudice. One of the 11 institutions was Royal Bank of Scotland, which agreed to pay $10 million to the Commonwealth of Virginia as part of the settlement. Last year, RBS was a defendant in the FHFA's lawsuit against Nomura in which Nomura was found liable for deceiving the GSEs in the sale of $2 billion worth of mortgage-backed securities. Nomura was ordered to pay $839 million. In June 2014, RBS agreed to pay $99.5 million to settle a separate FHFA suit claiming that the bank sold more than $2 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac between 2005 and 2007. Several large financial institutions have settled with the U.S. Justice Department and state regulatory agencies to resolve claims of mortgage-backed securities fraud: Citigroup for $7 billion in July 2014, JPMorgan Chase for a then- record $13 billion in November 2013, and Bank of America for a record $16.65 billion in August 2014. Below is a breakdown of the 11 institutions to settle with VRS and the Commonwealth of Virginia and the amount each agreed to pay as part of the settlement: • Countrywide Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith, Inc. (combined): $19.5 million in total • RBS Securities Inc.: $10 million • Barclays Capital Inc.: $9 million • Morgan Stanley & Co. LLC: $6.9 million • Deutsche Bank Securities Inc.: $5.6 million • Citigroup Global Markets Inc.: $4.75 million • Goldman, Sachs & Co.: $2.9 million • HSBC Securities (USA) Inc.: $2.5 million • Credit Suisse Securities (USA) LLC: $1.2 million • UBS Securities LLC: $850,000 Morgan Stanley Reaches $3.2 Billion Settlement for Toxic MBS ATTORNEY GENERAL CALLS AGREEMENT A 'VICTORY' FOR NEW YORKERS. NEW YORK // Morgan Stanley is the latest firm to settle federal and state probes concerning "deceptive" handling of mortgage-backed securities (MBS). This settlement will mark the fourth deal struck among big U.S. banks' and investment banking firms for their contributions to the 2008 financial crisis. The $3.2 billion settlement, announced in February by federal and state authorities and Attorney Gen. Eric T. Schneiderman, includes $550 million–$400 million worth of consumer relief and $150 million in cash–that will be allocated to New York State. Wesley McDade, managing director at Morgan Stanley, told MReport that the $3.2 billion settlement will not impact current quarter earnings. "We are pleased to have finalized these settlements involving legacy residential mortgage- backed securities matters," McDade said. "The firm has previously reserved for all amounts related to these settlements." In February 2014, Morgan Stanley entered into a settlement with the Justice Department for $2.6 billion to resolve claims that the investment firm packaged and sold toxic MBS in the run-up to the crisis. With litigation costs of $3.1 billion reported for 2014 as a result of the settlement, the firm's earnings for that year took a significant hit. As legal costs were significantly lowered for 2015, Morgan Stanley's net income rose from $3.5 billion in 2014 up to $6.1 billion in 2015. The settlement also includes an agreed-upon statement of facts that describes how Morgan Stanley misrepresented the quality of its MBS to investors, but "contrary to those representations, Morgan Stanley securitized and sold residential mortgage-back securities with underlying mortgage loans that it knew had material defects," Schneiderman's office stated. Morgan Stanley acknowledged that it increased the acceptable risk levels for loans in its securitized pools. According to the announcement, a May 31, 2006 email showed the head of Morgan Stanley's team asking a colleague, "please do not mention the 'slightly higher risk tolerance' in these communications. We are running under the radar and do not want to document these types of things." "Today's agreement is another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks," Schneiderman said. "Today's settlement will deliver resources to the families and communities that need them the most, while helping New Yorkers avoid foreclosure and spurring the construction of more affordable housing units statewide." JPMorgan Chase ($13 billion), Bank of America ($16.65 billion), and Citi ($7 billion) all entered into similar MBS settlements for their role in 2013 and 2014. A Bloomberg article questioned whether Goldman Sachs and Deutsche Bank would be next, especially in light of Goldman's recent $5.06 billion settlement in January and Deutsche's recent announcement that resolving its legal matters is on the horizon. SECONDARY MARKET

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