Bond insurer CIFG Assurance NA sued Goldman, Sachs & Co. and M&T Bank Tuesday for fraud and breach of contract involving its commitment to guarantee $275 million of mortgage-backed securities.
The suit, filed in the New York Supreme Court, is the latest example of bond insurers suing banks over soured mortgage securities to recoup devastating losses suffered when the housing market crashed.
“Goldman failed to disclose that the securitization constituted an integral part of an orchestrated corporate policy to offload billions of dollars in toxic exposure to mortgage-related assets, thereby duping investors and insurers such as CIFG to take on Goldman’s enormous market risk,” the lawsuit claims.
Simultaneously, the lawsuit claims Goldman was profiting “through underwriting fees, trading opportunities, and even shorting the subprime mortgage market — and doing so at the very same time it was touting subprime mortgage loans in order to sell residential mortgage-backed securities to unwitting investors and convincing CIFG to insure them.”
Allegaert Berger & Vogel LLP, the law firm representing CIFG, said Goldman Sachs Mortgage Co. ignored its own underwriting guidelines, as well as breaches by the loan originators of their own guidelines. “Indeed, the vast majority of a sample of non-performing loans in the securitized portfolios violated GSMC’s own published guidelines and-or warranties made by GSMC about the loans,” the lawsuit states.
Similarly, the loans originated by M&T Bank also showed breaches of representations and warranties, the law firm claims, and have been defaulting at high rates.
The bond insurer is seeking compensation for damages, including claims the insurer will pay out. CIFG is also asking that Goldman Sachs and M&T Bank repurchase the non-performing loans that were included in the securitization.
A spokesman for CIFG and M&T did not return calls for comment. A spokesman for Goldman Sachs declined to comment.
CIFG lost its triple-A ratings during the meltdown and is no longer writing new business. It is not the only bond insurer going after the banks — holding companies Assured Guaranty Ltd. and MBIA Inc. have been actively doing so in court.
MBIA has filed lawsuits against financial institutions including Bank of America Merrill Lynch, Countrywide Financial, Credit Suisse, and Morgan Stanley. Assured came to a $1.6 billion out-of-court settlement in April with Bank of America Merrill.
According to testimony before the New York State Assembly Committee on Insurance in February, Assured has reviewed 36,000 loan files totaling $5.3 billion, and it identified more than 31,000 files containing breaches of contract that could result in banks repurchasing the loans.
In similar testimony, MBIA chief executive Jay Brown said more than 80% of the loans it has reviewed violated underwriting policies.
