The ruling in the FHFA case against Nomura Securities and RBS: the essentials

In the summer of 2008, primarily to address the subprime mortgage crisis, the US Congress passed, and President Bush signed, the Housing and Economic Recovery Act of 2008.  One division of that act, called the Federal Housing Finance Regulatory Reform Act of 2008, merged some existing government agencies to create the Federal Housing Finance Agency (the “FHFA”).

FHFA logo

Since then, the FHFA oversees Fannie Mae and Freddie Mac, two pre-existing government-sponsored private entities whose mortgage-backed bond activity has long provided liquidity to banks for originating home loans. In the midst of the financial crisis, Fannie Mae and Freddie Mac were extremely frgaile, and a month after its creation, the FHFA put Fannie Mae and Freddie Mac into conservatorship.  (You can read more about these background events in this Wikipedia article.)

Among the FHFA’s actions as conservator for Fannie Mae and Freddie Mac was the filing of 16 lawsuits against financial firms, alleging misrepresentation in bond-related documents.  If true, the alleged misrepresentations would be violations of both federal and state securities laws.

Most of the firms settled (for $17.9 billion collectively).  However, two firms, Nomura Securities and Royal Bank of Scotland, chose to go to trial. (See this January article from Bloomberg on Nomura’s refusal to settle.)

Nomura logo

RBS logo

The trial started in March, and closing arguments were in April.  Because the prayer for relief that remained at trial didn’t include damages, but was rather a request for equitable relief (to have the defendants repurchase the securities), the defendants had no right to a jury.  As a result, the judge not only presided over the trial but was also the finder of facts. And just a few days ago, Judge Denise Cote of the US District Court for the Southern District of New York issued her 361-page ruling, finding for the FHFA.  Her decision opens with the following introduction:

“This case is complex from almost any angle, but at its core there is a single, simple question.  Did defendants accurately describe the home mortgages in the offering documents for the securities they sold that were backed by those mortgages?  Following trial, the answer to that question is clear.  The offering documents did not correctly describe the mortgage loans.  The magnitude of falsity, conservatively measured, is enormous.”

The decision contains no final judgment amount, instead directing the FHFA to submit a proposed amount in conformity with a formula in the opinion.  (The FHFA had initially sought over $1 billion.)

You can read the decision here.  It’s long, but it’s indispensable reading if you want to understand the complex reality underpinning the lawsuit.

Law Talk also recommends the Michael Lewis book The Big Short.  Not only does it help make the complex reality of toxic collateralized mortage obligations somewhat understandable, it’s also a pleasure to read (as are all Michael Lewis books).


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