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Earlier this week, a U.S. District Court Judge in Manhattan granted Assured Guaranty Ltd. (AGO - Snapshot Report) permission to partially move ahead with its lawsuit against UBS AG (UBS - Analyst Report). Assured, in a lawsuit filed against UBS, accused it of misrepresenting the quality of the loans that underlined $1.49 billion of mortgage-backed securities (MBS) that the latter had insured.
In 2006-2007, Assured had provided financial guaranty insurance, which warranted that if cash flows from the mortgages were inadequate for paying investors their dues, then it would cover those losses. However, a large number of these loans defaulted as they did not match the standards that UBS had set.
Further, Assured received permission to sue UBS for providing misleading information to the major rating agencies – Standard & Poor's (S&P) and Moody's as it was a breach of agreement. The company had placed a condition that MBS should be rated ‘AAA’ or slightly lower for receiving guarantees. It alleged that UBS, in an effort to get higher ratings for these risky MBS, offered fraudulent data to the two rating agencies.
At the same time, the judge dismissed a part of the litigation under which Assured demanded that UBS should repurchase $1.6 billion worth of these faulty mortgages. The judge stated that only the trustee for the MBS can make such a demand.
Apart from this, Assured has similar litigations pending against other banks – JPMorgan Chase & Co. (JPM - Analyst Report), Credit Suisse Group (CS - Snapshot Report) and Flagstar Bancorp Inc. (FBC). In addition, the company reached a settlement deal with Bank of America Corporation (BAC - Analyst Report) for $1.1 billion and Deutsche Bank AG (DB - Snapshot Report) for $165.6 million for similar charges.
With Assured being granted sanction to proceed with the litigation, the company will be able to recover some of the losses that it incurred as a result of these risky MBS.
Currently, Assured retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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