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Citi, BNY Mellon, U.S. Bancorp Relieved of FDIC Lawsuits

JPM USB BK C

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A federal judge has ruled out Federal Deposit Insurance Corporation (FDIC) lawsuits against Citigroup Inc. (C - Free Report) , The Bank of New York Mellon Corp. (BK - Free Report) and U.S. Bancorp (USB - Free Report) pertaining to poor mortgage debt. The regulator intends to recoup part of more than $695 million loss, which it incurred by selling soured mortgage debt initially owned by Texas-based failed Guaranty Bank. The news was first reported by Reuters.

Andrew Carter – the U.S. District Judge – dismissed FDIC’s lawsuit, brought in its capacity as the receiver for Guaranty Bank, on ground that the case ‘lacks standing.’ According to Carter, the alleged banks cannot be sued since the debt in question has been sold through a Mar 2010 resecuritization transaction. However, the regulator argued that the right to sue was a personal claim which cannot be transferred even after the resecuritization.

Per the case filed, the FDIC alleged negligence on part of the defendant banks as bond trustees. The banks failed to properly supervise underwriting of mortgages backing $2.7 billion of securities bought by the failed Guaranty Bank. Additionally, they failed to ensure that lenders either fix or repurchase troubled loans.

Further, the securities were issued by Bear Stearns Cos' EMC Mortgage Corp unit and Countrywide Home Loans Inc. -- a unit of Countrywide Financial Corp. -- between 2005 and 2007. Notably, in 2008, Bear Stearns was purchased by JPMorgan Chase & Co. (JPM - Free Report) while Bank of America Corporation bought Countrywide.

The Austin-based Guaranty Bank was closed in Aug 2009 and the FDIC stepped forward to arrange for the bank’s deposits. At that time, the regulator had estimated the bank’s closure to cost $3 billion to its deposit insurance fund. However, the FDIC suffered significant losses while selling the mortgage backed securities.

Currently, global banks are facing heightened scrutiny from regulators in relation to their business practices. Many of them have paid huge fines and compensation to settle lawsuits and probes over their past shoddy business practices. Although getting away with few allegations may help the banks save some legal costs, such cases are not always in their favor.

In Feb 2016, Citigroup agreed to pay $23 million to resolve claims of conspiring to manipulate the benchmark yen Libor rate. Further, U.S. Bancorp was charged with a $10-million penalty by The Office of the Comptroller of the Currency (OCC) for violation of the 2011 consent order related to mortgage practices from Oct 1, 2014 through Aug 30, 2015.

Currently, Citigroup and BNY Mellon carry a Zacks Rank #3 (Hold) and U.S. Bancorp  holds a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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