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Legal Mess for Banks Continues

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According to Bloomberg, the U.S. District Judge Louis Stanton in Manhattan rescinded the bid filed by Wall Street biggies along with other banks, regarding the dismissal of a lawsuit charged against the bank, accusing it of selling risky debts via misleading statements. Stanton has ordered the plaintiffs to pursue the proceedings over their claims against banks.

Such decisions come as a major blow to the big banks that are already burdened under numerous litigations related to the sale of risky mortgage-backed securities (MBS).


The aforesaid lawsuit has been filed by the Federal Deposit Insurance Corp. (FDIC) against major banks in 2012, over the alleged sale of $388 million of risky MBS to the failed Colonial Bank. Apart from attorney fees and court expenses, the FDIC asked for $189 million in damages.

Colonial Bank-based in Montgomery, Ala. failed in Aug 2009 and was acquired by BB&T Corp. (BBT - Free 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 - Free Report) , Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) , Wells Fargo & Company (WFC - Free Report) , Deutsche Bank AG (DB - Free Report) , Credit Suisse Group (CS - Free Report) , HSBC Holdings plc , UBS AG (UBS - Free Report) , Ally Financial Inc. and The Royal Bank of Scotland Group plc (RBS - Free Report) , among others. The FDIC has alleged that the lenders distorted the facts related to the MBS 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.

Our Viewpoint

The regulators are proactively trying to recover losses through lawsuits against banks that were involved in malpractices related to the sale of mortgage-backed securities. Moreover, 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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