Friday, September 30, 2011

Thanks to European investor lawsuits sheer stupidity of labeling RMBS and ABS deals highlighted

Shortly after the Issuers and Wall Street tried to sell the magic elixir of 'labels' to the European Central Bank and the Bank of England, European investors in residential mortgage-backed securities (RMBS) reminded everyone why labels on ABS deals are worthless.

According to an article in the Chicago Tribune, JP Morgan and Bank of America were hit with lawsuits from European investors who claimed that they were sold securities where the quality of the underlying mortgages did not meet the representations in the offering document.  If this is true, a label on the front of the offering document would have made no difference.

The only way to prevent this from occurring is by providing all market participants, including the investors, with current performance information on the underlying assets.  That way, market participants can verify that the representations made about the assets in the offering documents match the actual quality of the assets.

It is time for the ECB and the BoE to stop talking with and being misled by Issuers and Wall Street and to give your humble blogger a call so that an ABS data warehouse can be built that will actually restore investor confidence in purchasing ABS deals.
JPMorgan Chase & Co and Bank of America Corp were hit with new lawsuits by investors seeking to recover losses on $4.5 billion of soured mortgage debt, expanding the litigation targeting the two largest U.S. banks. 
Sealink Funding Ltd said between 2005 and 2007 it bought nearly $2.4 billion of residential mortgage-backed securities (RMBS) from JPMorgan and $1.6 billion from Bank of America in reliance on offering materials that were misleading about the quality of the underwriting and underlying loans. ...
Another plaintiff, Landesbank Baden-Wurttemberg, raised similar claims in a separate lawsuit against JPMorgan over $500 million of RMBS that it said it bought.

From a Reuter's article,
The lawsuits accuse the banks of packaging large amounts of high-risk mortgages by such issuers as Countrywide Financial now owned by Bank of America, and Bear Stearns and Washington Mutual, now owned by JPMorgan, in pursuit of higher profit. 
"This misconduct has resulted in astounding rates of default on the loans underlying the defendants' RMBS and massive downgrades of the (investors') certificates, the vast majority of which are now considered 'junk,'" the lawsuits said....
In a separate lawsuit filed on Thursday in the same court, Britain's Barclays Plc was sued by Germany's HSH Nordbank AG, which said it lost $40 million after being misled into buying risky RMBS. A Barclays spokeswoman did not immediately return a call seeking comment. 
Banks face many lawsuits by mortgage securities investors seeking to hold them responsible for losses on debt that once seemed safe but turned toxic once the housing and credit crises began more than four years ago.

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