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The Federal Deposit Insurance Corp. (FDIC) has filed a lawsuit against major banks over the alleged sale of $388 million of risky mortgage-backed securities (MBS) to the failed Colonial Bank. Apart from attorney fees and court expenses, the FDIC is seeking $189 million in damages.

Colonial Bank-based in Montgomery, Alabama failed in August 2009 and was acquired by BB&T Corp. (BBT - Analyst Report). At that time, Colonial Bank had nearly $25 billion in assets and the FDIC had estimated the cost to the federal deposit-insurance fund to be $2.8 billion.

The major lenders against whose units the FDIC filed the lawsuit include biggies like JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report), Wells Fargo & Company (WFC - Analyst Report), Deutsche Bank AG (DB - Analyst Report), Credit Suisse Group (CS - Snapshot Report), HSBC Holdings plc , UBS AG (UBS - Analyst Report), Ally Financial Inc. and The Royal Bank of Scotland Group plc (RBS - Snapshot Report), among others. The FDIC has alleged that the lenders distorted the facts related to the MBS they sold to Colonial Bank.

Moreover, the FDIC accused the banks of not disclosing authentic facts related to the quality of the underlying assets while selling risky MBS to Colonial Bank. This also included distortion of loan-to-value ratios that were based on the inflated property values. Further, the fact that a large number of these properties had second mortgages was also concealed.

The above-mentioned lawsuit is almost identical to the one that was filed by the U.S. Federal Housing Finance Agency (FHFA) against approximately a dozen big banks. The FHFA sued major banks for infringing commitments on the quality of about $196 billion MBS sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) during the housing bubble.

The FDIC’s action comes as a major blow to the big banks that are already facing numerous litigations related to the sale of risky MBS. However, the investors and other financial institutions which suffered as a result of these faulty practices are expected to get a breather.

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