Legal News

Who?s Playing David to the Wall Street Goliath? Another Bank, of Course

By Ashby Jones

A relatively obscure west coast bank, the Federal Home Loan Bank of Seattle, is, to quote Howard Beale (pictured), mad as hell and is not going to take it anymore.

The Seattle bank has launched a fusillade of lawsuits against Wall Street banks, seeking to force them to buy back mortgage-backed securities. In 11 separate lawsuits (11 lawsuits!) filed in late December in Washington state court, the Seattle bank alleges that it was misled by underwriters about the quality of $4 billion of securities it purchased as investments at the height of the housing boom. Click here for the WSJ story, from reporter Nick Timiraos.

If it seems like there’s been a lot of litigation arising out of the subprime meltdown, you’d be right. But the Seattle bank’s move is an order of magnitude more significant. While loan defaults have been rising for years, lawsuits against lenders and underwriters haven’t been widespread in part because they require plaintiffs to conduct time-consuming and expensive audits of loan files.

While a spokeswoman for the Seattle bank wouldn’t comment on the suits, she said the institution had “a responsibility to its member shareholders to enforce its rights.”

Analysts say the lawsuits are being closely followed by other investors. “Other similarly-placed investors would take note, both in the U.S. and outside,” said Bert Ely, a banking consultant based in Alexandria, Va. A ruling against the firms would “start a stampede” by other investors, Christopher Whalen, managing director for Institutional Risk Analytics said.

Seattle is suing the former Bear Stearns Cos., which was bought by J.P. Morgan Chase & Co. in 2008, to return $719 million in securities it bought between March 2006 and September 2007. That represents the largest of the 11 lawsuits brought by the home-loan bank. A J.P. Morgan spokesman declined to comment on the lawsuits.

Winning lawsuits against the Wall Street banks won’t be easy, analysts said. Courts are often unsympathetic to professional investors who lose money on complex investments unless they can prove fraud.

Full post as published by Law Blog - WSJ.com on February 16, 2010 (boomark / email).