The regulator that oversees credit unions is alleging in court that the world’s largest banks helped doom several community financial cooperatives. The National Credit Union Association (NCUA) filed a flurry of 22 lawsuits on Monday against banks and financial companies including JP Morgan Chase, Morgan Stanley, Barclays, UBS, Goldman Sachs, and Royal Bank of Scotland.
The suits break down into two sets of allegations, one involving misrepresentations of mortgage-backed securities and the other involving the international interest rate rigging scandal known as LIBOR. The NCUA says that five credit unions failed due to bad mortgage-backed securities they bought from nine different firms including Morgan Stanley and Goldman Sachs, but the suit focuses on two of those failures involving roughly $2.3 billion worth of securities. The NCUA says the banks misrepresented the securities and “abandoned the stated underwriting guidelines” in the securities contracts. Mortgage-backed securities were a primary mechanism the financial industry used to profit from the housing bubble. When improperly handled and originated loans that had been misrepresented by bankers, rated as safe investments by ratings agencies, and resold to other firms eventually went into default and foreclosure, trillions of dollars in on-paper value simply evaporated, leading to bankruptcies like those underlying the NCUA fraud lawsuits.
The second set of NCUA lawsuits filed Monday pertain to manipulation of the London Inter-Bank Offer Rate, or LIBOR. Five credit unions that later failed lost millions of dollars in income due to the alleged (and well-documented) conspiracy to keep that key interest rate artificially low. The NCUA suits against 13 international banks allege antitrust violations relating to LIBOR rigging. The scheme saved banks billions of dollars because even tiny upward nudges to the LIBOR figure could produce multi-million-dollar shifts in the value of large bank assets. The NCUA’s case is largely built upon evidence uncovered in legal settlements with three LIBOR manipulators. In addition to producing $2.5 billion in fines and other payments, those settlements made internal communications about LIBOR public.
Unlike commercial banks, credit unions are not-for-profit financial cooperatives. They generally offer lower interest rates on home and auto loans as well as credit cards. The banking industry has grown even more concentrated than it was at the time of the crisis, with the six largest banks holding assets equal to roughly 58 percent of the size of the U.S. economy. Credit union failures have contributed to industry consolidation, but the smaller banking institutions experienced a resurgence of sorts in 2012 as popular ire towards large banks helped motivate people to move their money into more locally oriented, less economically voracious deposit institutions.