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BlackRock, Pimco sue Wells Fargo, Citi, others over mortgage bonds

Allege that trustees should have forced banks to buy back toxic loans

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The repercussions of the banking industry’s pre-crisis business model have been dire and far-reaching.

In the aftermath of the financial crisis, banks have been forced to defend their lending practices in courtrooms all over the country.

he biggest banks have faced lawsuits from investors, homeowners and federal, state and even local governments. And the lawsuits keep coming.

The collapse of the mortgage-backed securities market led to, amongst many other things, many investors losing millions. And they’ve gone through many different legal means to try to get that money back. Now, a group of institutional investors are trying a different tactic against the banks.

BlackRock (BLK) and Pimco are leading that group of investors who have filed suit against six of the largest mortgage bond trustees, alleging that the trustees failed to properly administer the mortgage trusts by not forcing mortgage lenders to repurchase allegedly toxic loans.

According to various media reports, BlackRock and Pimco have sued units of Wells Fargo (WFC), US Bancorp (USB), HSBC (HSBC), Citigroup (C), Deutsche Bank (DB) and Bank of New York Mellon (BK) in New York State Supreme Court, seeking damages for losses that exceed $250 billion.

At the core of the suit are 2,200 RMBS trusts valued at more than $2 trillion and issued between 2004 and 2008, according to a report from Reuters.

“The lawsuits claim the trustees disregarded their duties to protect investors despite knowing that the trusts held a large number of loans that did not meet their contractual obligations,” Reuters report states.

Analysts from Compass Point Research and Trading believe that this represents a “significant shift in bond investor’s mortgage litigation strategy.”

According to Compass Point’s analysts, trustees have long argued that their role is far narrower and that their primary responsibility is to administer the operations of the trust. The investors are claiming something vastly different in the lawsuits.

Reuters reports that the lawsuit filed against Citibank states, “The trustees were aware of an ‘industrywide abandonment of underwriting guidelines’ for the loans and ‘pervasive and systemic deficiencies infecting the trusts' collateral.’”

Compass Point’s analysts say that the potential liability for trustees is yet be determined, but for now, it’s another battlefront where the big banks must again defend their actions.

And it probably won’t be the last one either.  

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