On UBS and the FHFA Lawsuit

The Federal Housing and Finance Authority announced this week that it was suing UBS for mortgage fraud. (I'm shocked!) This is a big deal. The damages being claimed start at $900mm. I find this lawsuit interesting. Some background.

On July 10, 2010 FHFA issued a total of 64 subpoenas to various financial institutions. All of these lawsuits were related to losses that either Fannie or Freddie had incurred as a result of improper mortgages that were sold to the Agencies. UBS is the first formal legal action related to those subpoenas.

Two questions come to my mind. (I) Why UBS? And (II) what are the broader implications of this?

On the why UBS:

Federal prosecutors often push for a trial when the opposition is being uncooperative regarding a settlement. I don’t think this is the case with UBS. While I’m sure that UBS is pushing as hard as they can, I doubt they are the only ones doing so. It is "Un-Swiss" to fight, better to settle.

Federal prosecutors only go to trial when they have a very good case. I think this is the issue. FHFA’s lawyers have drafted a 102-page complaint that has been filed in Federal Court. The brief is very detailed. This is a summary of the charges against UBS.

Note that there are three claims of violations of the 1933 securities act (a big deal). There are also numerous allegations that UBS provided materially false information (also a big deal).


I think UBS is a soft target. This outfit has been ripped to shreds by the Feds over the past few years. In each case UBS’s lawyers folded and UBS paid big mega bucks. So if you were a hotshot federal prosecutor you might tee up UBS first knowing from prior experience that when they are pushed, they crater.

That still does not fully explain why UBS. FHFA’s lawyers have to have a broad battle plan. UBS is the first salvo in that plan. So my guess on why UBS, is that this bank is representative of the other lawsuits that are to follow. When UBS is smashed to pieces in court the other 63 names that got subpoenas will crap in their pants, throw in the towel and write big checks to the FHFA. That would be a good plan to win this war.

So if I’m right and UBS is a stalking horse to get to other big players, where might this lead?

I actually don’t know exactly where this might lead. I tried to find out by contacting the FHFA. I asked if they would provide the other 63 names that are facing big lawsuits. “Nix” was the answer from FHFA. There is no public source of information as to who got the subpoenas. I find that interesting. We have 64 of the biggest names in finance that are being sued for tens of billions of dollars and we have no idea who they are. I think this is material information for investors; it is material information to the public. Why the secrecy?

It’s actually not that hard to figure out who is on the FHFA “target list”. Who are the 64? Everyone, is the answer. It’s hard to miss anyone big when there are so many names involved.

I think that UBS was chosen first in part because they were a middle of the road “bad boy”. They were neither small nor large. Most of the dreck that UBS originated and sold to F/F was originated in 2005 and 2006. The following is a league table for mortgage origination during this period. UBS is mentioned, but note that they are 10% of some of the other players.

This table does not prove much. We will have to see how this works out. My guess is that UBS is the tip of an iceberg. What is behind the UBS suit are monster suits against some of the biggest financial names on the globe.

The press has reported that the UBS suit is about $900mm. That’s only partly correct. FHFA is claiming that they have already suffered losses of  $900mm. But that is not a cap on the damages that may be awarded. This is the PRAYER FOR RELIEF section of the court document. (Why do they call it a Prayer?)

Note that FHFA is asking to be compensated for its losses. They want UBS to pay for the legal expenses (astronomical) they want penalty interest at the highest rate the law allows and they also want the dreaded punitive penalties. I’m sure that the UBS lawyers are worried about the $900mm claim, but they have to be very worried about this:

Such other and further relief as the Court may deem just and proper.

If the case goes against UBS the Judge could award anything. A $1.5b total award is not out of the question. Should this happen and we see a big penalty as well as loss compensation, it will scare the life out of the other bankers. One after the other they will fold on this should UBS lose the case.

The UBS/FHFA suit brings another big cloud over the financial players of the world. The question of who is involved and to what extent is a bit of a mystery at this point. The answer is “they” are all dirty, and “they” will be paying big bucks to settle these claims. Just another reason why not to own the financial stocks.