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Did FHFA spook the big banks with $885M UBS settlement?

Mega settlement may force financially conscious banks not to bargain

August 15, 2013

The Federal Housing Finance Agency may have overplayed its hand when it secured a nearly $1 billion settlement for effectively ending a mortgage-bond lawsuit filed against UBS Americas.

Essentially, the international bank agreed to pay $885 million to settle a dispute over toxic residential mortgage-backed securities (MBS). 

But if the FHFA expects more settlements with U.S.-based banks facing similar claims, they may want to hold their breath.

In today’s environment, where banks are worried about their overall liquidity and the changing capitalization landscape in the post-Basel III world, the payout for settling is not as glamorous or stress relieving when the price just isn’t right.

Back in 2011, more than a dozen banks – including Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM) – were named as defendants in numerous lawsuits that accused the mega banks of selling mortgage-backed securities backed by toxic underlying loans to Fannie Mae and Freddie Mac.

FHFA in its role as conservator ended up filing suit on the GSEs’ behalf, with the dispute centered around $200 billion in RMBS sold within 500 securitizations.

Since then, FHFA has settled with Citigroup, and it was reported Thursday that Bank of America may also settle.

But Fitch Ratings says the latest UBS settlement may force the remaining banks to stay on the sidelines and simply fight it out.

While legal fees and litigation are usually no walk in the park, neither is a massive settlement that forces an institution to take a major hit all at once.

Of course, each institution will chart its own course after calculating the firm’s individual circumstances. 

But Fitch doesn’t rule out the possibility that remaining banks will play hardball waiting for either a smaller settlement or another resolution.

“Although not necessarily setting a formal precedent, the high settlement cost to UBS relative to the outstanding portfolio amount could lead to additional provisions at other banks,” Fitch said.

Still, how hard they fight or whether they settle could hinge on each bank’s ultimate exposure.

Despite all the uncertainty, Fitch believes the legal and regulatory costs for banks will remain high, but manageable.

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