Big banks reach $250M settlement in suit alleging GSE bond-price fixing

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Twelve banks and institutions that are among the largest underwriters of government-sponsored enterprise securitizations agreed to pay more than $250 million in damages as part of a proposed settlement in a federal lawsuit alleging the institutions colluded with traders to fix secondary-market prices of Freddie Mac and Fannie Mae bonds.

The agreement was filed Monday in the Southern District of New York, with each of the banks agreeing to adhere to “robust antitrust compliance measures” as demanded in the class-action lawsuit filed by Pennsylvania Treasurer Joseph Torsella on behalf of bond investors, including large pension funds.

The 12 banks in the settlement are BNP Paribas; Cantor Fitzgerald; Citigroup Global; Credit Suisse; HSBC; JPMorgan; Bank of America Merrill Lynch; Pierce, Fenner & Smith; Morgan Stanley; Nomura Securities; SG Americas; TD Securities; and UBS Securities.

Four other banks were also included in the lawsuit originally filed in March, but those institutions — Deutsche Bank, First Tennessee Bank, Goldman Sachs and Barclays — had previously settled with Torsella’s office.

Total recoveries in the lawsuit have now topped $386 million, according to a release from Torsella’s office. All 16 banks underwrote $3.97 trillion of Fannie and Freddie bonds during that seven-year period, accounting for 77.2% of the GSEs’ total bond issuance.

Barclays was the largest underwriter of GSE bonds, with a 14.07% market share during that period, totaling $723.69 billion, according to court documents.

The banks denied wrongdoing in agreeing to settle, according to reports from Reuters.

According to the release from Torsella’s office, the banks were violating antitrust law when “they exploited their dominant market position and conspired to unlawfully increase prices, overcharging and/or underpaying investors in GSE bond transactions."

The transcripts were provided by Deutsche, which previously settled with Torsella’s office and in September reached a cooperation deal with the Justice Department.

Torsella’s office announced the agreement Tuesday.

The lawsuit alleged the activity occurred between 2009 and 2016. “The evidence in this case was particularly damning. The brazen attitude exhibited by Wall Street traders towards public institutional buyers of GSE bonds was shocking,” Torsella stated in the release.

The lawsuit, spurred by a criminal probe by the U.S. Department of Justice that began in July 2018, uncovered evidence of “more than a dozen online chatrooms used by traders representing the defendant banks to discuss and agree on artificial prices before bringing the bonds to market,” the release said.

GSE bonds finance Fannie and Freddie’s operations that include acquiring and guaranteeing residential mortgage originations from lenders underwriting loans to agency guidelines. The bonds are mostly marketed to investors from the agencies’ credit-risk transfer securitization programs, and although they are unsecured notes, they are considered low risk bearing high investment-grade ratings due to an implicit federal guarantee.

Court documents included transcripts of online discussions between traders and issuers reportedly agreeing on artificially inflated prices in the secondary market for newly-issued GSE bonds.

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GSEs Lawsuits Fannie Mae Freddie Mac
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