UBS to pay $1.4b to settle US fraud charges on subprime loans

UBS will pay $1.4 billion to settle US charges that it defrauded investors in the sale of mortgage-backed securities, resolving the last big case stemming from the 2008 financial crisis, the Justice Department announced Monday.

The department agreed to dismiss a civil complaint against UBS in exchange for the fine, which brings the total federal penalties to $36 billion in settlements from nearly 20 financial institutions, a Department of Justice (DOJ) press release said.

In its civil case launched in 2018, the DOJ had argued that UBS knowingly made false and misleading statements in connection with the sale of 40 residential mortgage-backed securities (RMBS) issued in 2006 and 2007.

The DOJ had alleged that contrary to UBS representations, the giant Swiss bank "knew that significant numbers of the loans backing the RMBS did not comply with loan underwriting guidelines that were designed to assess borrowers' ability to repay."

The DOJ's original complaint quoted a UBS mortgage official as referring to a pool of loans as "a bag of sh[*]t" and another employee who called a group of loans "quite possibly better than little beside leprosy spores."

Ultimately the 40 RMBS "sustained substantial losses," the DOJ said.

"With this resolution, UBS will pay for its conduct related to its underwriting and issuance of residential mortgage-backed securities," said Breon Peace, US Attorney for the Eastern District of New York.

"The substantial civil penalty in this case serves as a warning to other players in the financial markets who seek to unlawfully profit through fraud that we will hold them accountable no matter how long it takes," he added.

UBS characterized the case as a "legacy matter," adding in a statement that the funds have been provisioned for in earlier periods.

- Working group -

At the direction of former president Barack Obama, then Attorney General Eric Holder established the RMBS working group in January 2012, along with senior officials at other Washington agencies and then New York Attorney General Eric Schneiderman.

The goals were: "to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help Americans finally turn the page on this destructive period in our nation's history," according to a DOJ press release.

The biggest agreements were Bank of America's $16.7 billion settlement announced in August 2014 that included $7 billion in relief to homeowners and communities and JPMorgan Chase's $13 billion settlement in November 2019 that included $4 billion in such relief.

"The results achieved by the RMBS Working Group are a testament to the exceptional dedication and hard work by department attorneys over many years," said Principal Deputy Assistant Attorney General Brian Boynton

Despite the sizeable sums, the DOJ did not prosecute high-level financial executives in RMBS cases despite alleging widespread fraud.

Bartlett Naylor, a corporate governance expert at NGO Public Citizen, characterized the DOJ's lack of criminal prosecutions of culpable individuals as a major shortcoming.

"Until individuals are held to account, the class being punished are shareholders," Naylor told AFP. "Unless individuals are named and incarcerated, it won't have the remedial effect that justice requires."