Investments

Societe Generale fined $50 million for pre-crisis RMBS fraud

Lied to investors about quality of underlying loans

As the Obama administration prepared to clean out its collective desks last week, the government announced that it wasn’t quite done dealing with with the events that led to the financial crisis.

In those last few days, the Obama administration announced multi-billion dollar settlements with two foreign banks, Deutsche Bank and Credit Suisse, for each bank’s mortgage securitization practices leading up to the housing crisis.

Germany’s Deutsche Bank settled for $7.2 billion, while Switzerland’s Credit Suisse agreed to a $5.28 billion settlement.

But on Friday, as most people focused on the inauguration of Donald Trump, the Obama administration announced one last settlement with a foreign bank for its pre-crisis activities – France’s Societe Generale.

According to the Department of Justice, Societe Generale will pay a $50 million fine to resolve claims that the bank made a series of “false representations” about the loans that backed a residential mortgage-backed securitization, SG Mortgage Securities Trust 2006-OPT2.

As part of the settlement agreement, Societe Generale acknowledged that it made false representations to prospective investors in SG 2006-OPT2, the DOJ said.

Those misrepresentations caused investors, including federally insured financial institutions, to suffer “significant losses” on their investments in SG 2006-OPT2.

According to the DOJ, SocGen acknowledged that it falsely represented that the underlying loans were originated using the loan originator’s underwriting guidelines.

In fact, SocGen’s third-party due diligence vendor found that almost 40% of the loans it reviewed were underwritten “outside of guidelines and lacked adequate compensating factors to make the loans eligible for securitization,” but SocGen did not disclose those results to investors.

SocGen also admitted to representing to investors that no loan in SG 2006-OPT2 had a loan-to-value or combined loan-to-value ratio of more than 100%, which the company knew to be false.

SocGen was also well aware of the widespread issues with subprime loan origination and securitization, as one senior member of SocGen’s Contract Finance group remarked at the time: “The whole process [was] a joke.”

According to the DOJ, as part of the settlement agreement, SocGen agreed to fully cooperate with any ongoing investigations related to the conduct covered by the settlement agreement.

“SocGen’s acknowledgement of its misconduct in the securitization of SG 2006-OPT2 was a critical component of this resolution. It severely impacted investors and institutions across the United States, including in this district,” said U.S. Attorney for the Eastern District of New York Robert Capers.

“Most emphatically, it was not a ‘joke’”, Capers continued. “We will not tolerate investment banks making false representations to investors – if and when they do so, they will be held accountable.”

In a statement provided to HousingWire, SocGen said that it is “pleased” to put this issue behind it.

“Societe Generale is pleased to have resolved this legacy matter involving a business that the firm exited in 2008,” the company said.

3d rendering of a row of luxury townhouses along a street

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