Credit Suisse Group AG (CSGN) and Citigroup Inc. (C) are among banks grappling with a round of U.S. probes into mortgage-bond sales, as the government uses a 1989 law to extend scrutiny of Wall Street’s role in the credit crisis and seek additional penalties from the industry.
The Justice Department is examining whether both companies violated the Financial Reform, Recovery and Enforcement Act, which targets misconduct affecting federally insured financial firms, according to people briefed on the situation. JPMorgan Chase & Co. (JPM) and Bank of America Corp. also are facing FIRREA inquiries, people familiar with those cases have said.
A task force created by President Barack Obama last year is making use of the law, a relic of the savings-and-loan crisis of the 1980s, while examining mortgage-bond underwriting that fueled investor losses and prompted unprecedented government bailouts of banks in 2008. FIRREA carries a 10-year statute of limitations, giving investigators twice as much time to bring complaints than allowed under other securities laws.
The wave of FIRREA probes will lead to “increased litigation costs for banks resulting from government investigations and related private plaintiff litigation and increased exposure for executives involved in these probes,” said Keith Miller, a partner at Perkins Coie LLP in New York.
The task force, comprising state and federal agencies, issued subpoenas and a public call for whistleblowers, amassed millions of documents and farmed out the work to about 10 U.S. attorneys offices. The Justice Department’s mortgage-bond inquiries now focus on about eight banks, a person familiar with the matter said earlier this week.
Citigroup, the third-largest U.S. lender, faces probes by U.S. attorneys in Colorado and Brooklyn, New York, according to the people, who asked not to be identified because the inquiries aren’t public. The investigation of Zurich-based Credit Suisse, Switzerland’s second-biggest bank, is being run by U.S. attorneys in Colorado and New Jersey, the people said. The Financial Times reported on its website Oct. 23 which attorneys offices are probing the banks.
Spokesmen for the three U.S. attorney’s offices, the Justice Department and the companies declined to comment or didn’t respond to messages seeking comment.
Citigroup sold $91 billion in home loans through private-label mortgage pools from 2005 through 2008, according to the New York-based firm’s most recent quarterly securities filing.
Litigation over private-label securitizations “certainly is the biggest of any remaining mortgage-related issues that we have,” Citigroup Chief Financial Officer John Gerspach, 60, said on an Oct. 23 conference call with bond investors. He didn’t describe specific demands.
The bank wrote in its annual report for 2012 that it has been cooperating with requests for information from regulators, states and the Justice Department about its handling of home loans, including their packaging and sale in securities.
Credit Suisse sold about $150 billion in home loans to private investors and other non-agency mortgage-bond pools from 2004 through 2010, according to the Swiss bank’s 2010 annual report. About $21.7 billion of the loans were sold primarily to banks, the lender said. The bank said in the report that it’s cooperating with regulators and other government entities looking into the packaging and sale of mortgage securities.
Wall Street’s six biggest banks have piled up more than $100 billion in legal costs, including settlements and lawyers’ fees, since the financial crisis while responding to claims over foreclosures and shoddy mortgages, data compiled by Bloomberg show. The time limits for investigations allowed under FIRREA may add to those losses.
The four banks being examined for FIRREA violations issued a total of $788 billion of non-agency mortgage-backed securities between 2005 and 2007, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Bank of America, including deals handled by Countrywide Financial Corp. and Merrill Lynch & Co., was the top issuer with $549 billion, the data show.
FIRREA provides for penalties of more than $1 million for each fraudulent statement or act, and as much as $5 million for continuing violations of underlying criminal statutes. Those limits may be exceeded to recover ill-gotten gains or investor losses, according to the Justice Department.
U.S. attorneys in Charlotte, North Carolina, sued Bank of America in August, citing FIRREA. The complaint, seeking unspecified penalties, accused the firm of misleading investors about the quality of loans tied to $850 million in mortgage-backed securities. The bank, which is disputing the case, has said buyers of the bonds were “sophisticated investors” capable of assessing the risks.
The lender was accused in the lawsuit of defrauding investors, including federally insured financial institutions. The U.S. also said that alleged misconduct posed financial risks to Charlotte-based Bank of America itself by making it vulnerable to civil litigation and regulatory cases.
Bank of America is facing additional FIRREA scrutiny, two people with direct knowledge of the matter said this week. U.S. attorneys in Georgia and California are conducting probes tied to Countrywide., the subprime lender Bank of America acquired in 2008, the people said. U.S. attorneys in New Jersey are reviewing deals involving Merrill Lynch, which the firm purchased in 2009, the people said.
JPMorgan, the biggest U.S. bank, reached a tentative $13 billion agreement with the Justice Department last week to end civil claims over mortgage-bond sales, including those handled by Bear Stearns Cos. and Washington Mutual Inc. operations purchased in 2008, a person familiar with the talks said.
U.S. attorneys in California are examining potential FIRREA violations by New York-based JPMorgan that would be resolved in the settlement to end a variety of state and federal probes, a person with knowledge of the deal has said. Terms of the accord, described by people familiar with the talks, are still being negotiated.
Joe Evangelisti, a JPMorgan spokesman, declined to comment. The bank recorded a $7.2 billion charge in the third quarter to cover the cost of mounting litigation and regulatory probes, resulting in the first quarterly loss under Chief Executive Officer Jamie Dimon.