Allstate's MBS exposure hits $2.78 billion
Allstate (ALL) is suing at least seven financial institutions and their affiliates for selling the insurance giant billions of dollars worth of mortgage-backed securities that it contends are affected by toxic mortgages. The insurance company acquired approximately $2.78 billion in mortgage securities from Countrywide, now owned by Bank of America (BAC); JPMorgan Chase (JPM) and its affiliates Bear Stearns and Washington Mutual; Citigroup Inc. (C); Ace Securities Corp. and Deutsche Bank Securities; Residential Funding Co. and GMAC Mortgage; Credit Suisse Securities (CS) and Merrill Lynch & Co. (ML). In each case, Allstate claims the original seller of the securities issued documents about the transaction that "contained untrue statements and omitted material facts." Given that most of the securities were acquired between 2005 and 2008, not all of the parties named in the suits were the initial sellers of the securities. JPMorgan acquired Bear Stearns and Washington Mutual, exposing the bank to securities issued by those firms. Earlier in March, JPMorgan attorneys requested the suit moved to federal court. Bank of America acquired Countrywide in 2008, pulling in all of its assets, including ties to more than $700 million of MBS Countrywide sold to Allstate. That case is pending in a New York state court along with a case involving JPMorgan, Bear Stearns and WaMu, which involves a sale of $750 million of mortgage-backed securities to Allstate. The insurer alleges Residential Funding Co. and GMAC Mortgage sold it about $500 million of toxic MBS. In each case, Allstate is requesting damages, a jury trial and recovery of monetary losses, attorneys fees and court costs. John Jay, a senior analyst with Aite Group, said it's "too risky to extrapolate that the health of Allstate is in question" just because the firm is pushing forward with a series of high-dollar MBS lawsuits. In fact, he calls that a "huge stretch." But, he said, "Even for a completely healthy company if they are within their rights to go through every effort to be made whole as much as possible that ultimately is their job because they will have to answer to the shareholders." Jay points out that many of the plaintiffs in MBS cases could find themselves in a situation where they are trying to "squeeze blood from a rock" since some of the defendants are moving the cases to federal court, asserting that the original sellers of the securities are now bankrupt entities. "They can take it as far as they want to, but then the question is the extent to which they can win," he added. Given how long these suits can drag out and the breadth of the subprime debacle, Jay sees it taking time for MBS cases like Allstate's to be moved through the system. The outcome is not obvious, he said. "It's too simplistic to pin this on just the sellside or the buyside, or even the ratings agencies. It's the entire system," Jay said when discussing what caused the type of MBS losses that Allstate experienced. "Once there is a systemic type of blow up, then people should expect multiple lawsuits going back and forth. The nature of recovery is to try and get back as much as you can." Write to Kerri Panchuk.