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Credit Union Regulator Eyes UBS for Faulty RMBS

The ""National Credit Union Administration"":http://www.ncua.gov/Pages/default.aspx (NCUA) is suing the global investment firm UBS Securities for allegedly falsely representing the level of risk associated with mortgage-backed securities (MBS) the firm sold to two federal credit unions. According to NCUA officials, the defaults and losses that resulted directly contributed to the collapse of both credit unions.

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The suit, filed in a federal district court in Kansas, alleges 10 counts of securities laws violations by UBS at both the federal and state level. According to the complaint, UBS misrepresented and omitted material facts in the offering documents of $1.1 billion in securities sold to U.S. Central Federal Credit Union and Western Corporate Federal Credit Union (WesCorp).

""Both corporate credit unions subsequently failed,"" after purchasing the ""faulty securities,"" NCUA said in a statement.

NCUA has previously filed similar actions against JPMorgan Securities, Goldman Sachs, and Wachovia, along with two suits against RBS Securities. The federal regulator says recoveries from these six legal actions, including UBS, will reduce losses accumulated from credit union failures since the crisis and lessen the financial burden the rest of the sector must carry to make up for those losses.

The agency has settled MBS misrepresentation claims worth more than $170 million with Citigroup, Deutsche Bank Securities, and HSBC.

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NCUA is the first federal regulatory agency for depository institutions to recover losses on behalf of failed financial institutions that resulted from investments in so-called faulty securities.

""The strength of our entire financial system relies on trust and accountability ... [and] ... UBS Securities violated this trust, which contributed to the collapse of two corporate credit unions and the resulting crisis in the credit union industry,"" said Debbie Matz, chairman of NCUA's board.

""NCUA has worked to restore stability to the credit union system. Now we intend to hold UBS Securities, as well as other responsible parties, accountable,"" Matz said.

In addition to misrepresentation and omission of critical investment information, NCUA's complaint alleges systemic disregard, on the part of UBS, for the underwriting guidelines affirmed in the offering documents. UBS' actions, according to NCUA, caused U.S. Central and WesCorp to believe the risk of loss was minimal, when in fact the risk was substantial.

As liquidating agent for U.S. Central and WesCorp, NCUA says it has a statutory duty to try to recover losses from responsible parties. Losses from credit union failures must be paid from NCUA's Temporary Corporate Credit Union Stabilization Fund.

Expenditures from this fund must be repaid through assessments against all federally insured credit unions. Thus, any recoveries would help to reduce the amount of future assessments on credit unions and minimize the cost of failures on the industry as a whole, NCUA explained.

Operating much like the FDIC, NCUA is the independent federal agency created by Congress to regulate, charter, and supervise federal credit unions.

With the backing of the full faith and credit of the U.S. government, NCUA operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 93 million account holders in all federal credit unions and the majority of state-chartered credit unions.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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