For FHFA's Targets, It Paid to Pay Up Quickly
Thanks to a press release issued on Thursday, we now know the dollar values of every settlement the Federal Housing Finance Agency has reached with financial institutions over the last year. The newly public numbers support what some observers have long suspected: General Electric Co. and Citigroup Inc. were smart to exit the litigation early.
The FHFA, which serves as conservator to Fannie Mae and Freddie Mac, sued 18 banks in the summer of 2011, alleging they duped Fannie and Freddie into purchasing about $200 billion in mortgage-backed securities. Since January 2013, the agency has settled with six of the defendants. In chronological order, GE, Citi, UBS AG, JPMorgan Chase & Co., Ally Financial Inc., and Deutsche Bank AG have opted to make deals so far. (The FHFA also struck a deal with Wells Fargo & Co., but that dispute was resolved out of court.)
Until this week, the only public information was that UBS paid $885 million, Deutsche Bank paid $1.9 billion, and JPMorgan paid $4 billion (we're not including JPMorgan's separate payment to the FHFA of $1.1 billion to resolve mortgage repurchase claims). But on Thursday the FHFA revealed that it got $6.2 million from GE, $250 million from Citi, and $475 million from Ally.
The relatively small size of the GE and Citi settlements suggest that they got a discount for being the first two defendants to settle. GE inked its deal with the FHFA in January 2013, and Citi followed suit in May 2013—two months before the U.S. Court of Appeals for the Second Circuit rejected a bid by the banks to challenge a series of unfavorable rulings from U.S. District Judge Denise Cote. As we've reported, since then the FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman have continued to pile up pre-trial victories.
The early settlement premium becomes even clearer when you consider the potential exposure that GE and Citi faced. Fitch Ratings has devised a formula to compare the various FHFA settlements: Divide the face value of the securities at issue in each case by the settlement amount. GE sold Fannie and Freddie $549 million in mortgage-backed securities, so under Fitch's approach the agency got back a bit more than 1 percent of what it was seeking, or 1 cent on the dollar. Citi was sued over $3.5 billion in securities, but that exposure eventually increased to $4.73 billion, so its deal amounts to about 5.3 cents on the dollar. By way of comparison, the JPMorgan settlement—which the Wall Street Journal predicts will be a benchmark for future FHFA deals—works out to about 11 or 12 cents on the dollar, depending on how you calculate the bank's exposure.
Despite being the third bank to settle, UBS didn't get much of an early-bird discount. The Wall Street Journal and Fitch have both estimated that UBS paid 14 cents on the dollar. We put that figure closer to 12 percent, based on revised exposure estimates and factoring out a portion of the settlement that resolved mortgage repurchase claims. Before UBS settled, its lawyers at Skadden, Arps, Slate, Meagher & Flom led the defense and argued in court on behalf of all the defendants.
Paul, Weiss, Rifkind, Wharton & Garrison represented Citi. JPMorgan had Sullivan & Cromwell. Simpson Thacher & Bartlett represented Deutsche Bank. Ally looked to Mayer Brown and Kirkland & Ellis. Weil, Gotshal & Manges represented GE.