Nomura’s resistance is less about the size of a penalty, which one estimate says won’t exceed $300 million, than its belief that the U.S. unit sued by the Federal Housing Finance Agency did nothing wrong, said the people, who asked that they not be named because the negotiations are private. Nomura also asserts Fannie Mae and Freddie Mac might not suffer losses on the $2 billion of bonds it sold them, the people said.
Nomura still has time to settle before a trial that’s scheduled to start in March. The Japanese investment bank’s willingness to fight so far shows how it stands out from big U.S. lenders that were eager to get past the multiple investigations they faced following the 2008 financial crisis.
“Maybe this isn’t as big a deal for them because they’re not as big in the U.S.,” said Peter J. Henning, a law professor at Wayne State University who has been following the cases. “You look down that list, and you see Goldman on there, Bank of America. Those are banks that have to care about headlines.”
$196 Billion of Bonds
Jonathan Hodgkinson, a New York-based spokesman for Nomura, declined to comment on the case, as did Peter Garuccio, a spokesman for the FHFA.
The FHFA claims go to the heart of Wall Street’s contribution to the housing boom and bust: Banks bundled toxic mortgages into bonds and then misled investors about the quality of the underlying loans.
The regulator’s lawsuits, filed almost four years ago, accused banks of improperly selling $196 billion of bonds to Fannie Mae and Freddie Mac before the companies’ near insolvency in 2008. A total of $17.9 billion has been collected from lenders, including JPMorgan Chase & Co. and Goldman Sachs Group Inc.
“Very little litigation has gone to trial, because the banks recognized that there was such populist anger against Wall Street that no one wanted to risk what a trial could result in,” said Jaret Seiberg, a managing director at Guggenheim Securities LLC in Washington.
The suit against Nomura Holding America Inc. alleges securities sold to the mortgage-finance companies were backed by loans with a range of underwriting flaws, including faulty appraisals and misrepresentations of borrowers’ finances.
In court documents, the Nomura unit said it didn’t knowingly sell bonds backed by fraudulently originated loans. Nomura also said it conducted extensive reviews of the underwriting on mortgages packaged into securities, accurately disclosed risks and invested in riskier portions of the same assets that were sold to Fannie Mae and Freddie Mac.
“The key to the case is whether there was a material misstatement in the prospectus or in the offering documents, and that’s what the fight will be about,” Henning said in an interview.
If the case goes to trial, Nomura will try to show that any misstatements didn’t cause losses, because that could reduce damages. According to the bank’s analysis, Fannie Mae and Freddie Mac have so far earned about $1.6 billion in payments on their $2 billion investment, said the people.
Besides Nomura, the only bank with an outstanding case is Royal Bank of Scotland Group Plc, which has set aside 1.9 billion pounds ($2.9 billion) to cover the cost of an accord from mortgage-backed securities litigation and other investigations.
Nomura said it can’t provide an estimate of potential losses, because of “legal uncertainties,” according to a December filing with the U.S. Securities and Exchange Commission.
If Nomura does agree to a penalty, it could pay between $100 million and $300 million, according to an analysis by Bloomberg Intelligence.
The estimate is based on what Fannie Mae and Freddie Mac paid Nomura for the securities and other banks’ settlements with the FHFA. JPMorgan paid $4 billion, or 12.1 percent of the $33 billion of bonds at issue, and Barclays Plc agreed to pay $300 million, or 5.7 percent.
Pretrial rulings haven’t gone in Nomura’s favor. The judge in the case, Denise L. Cote, last week approved the FHFA’s request to drop some of its claims that would have required a jury trial, over Nomura’s objections. Cote will decide the remaining claims in the case herself.
Seiberg said the FHFA suits, combined with a number of additional settlements involving other regulators, have helped hold banks accountable for past misdeeds but also made lenders wary of issuing mortgages.
“The amount of government litigation has slowed the housing recovery,” Seiberg said. “The flip side is that the FHFA has recovered close to $20 billion that’s gotten passed along to taxpayers.”
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