Citigroup (NYSE:C) became the latest addition to the list of banks sued by Sealink Funding over alleged misrepresentations linked to the sale of residential mortgage-backed securities (RMBS) which lost a large chunk of their value during the economic downturn of 2008. Sealink, which was formed as a placeholder entity to hold the riskiest assets accumulated by the German Landesbank Sachsen group, filed a lawsuit against the country’s third largest bank in terms of assets claiming damages over RMBS worth $513 million.
Competitors JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB) and UBS (NYSE:UBS) are other global banking giants who have seen similar lawsuits filed against them by Sealink over recent months. The timing of this lawsuit, however, is what poses a bigger problem for Citigroup which is still coming to terms with the top-level management changes it underwent after the abrupt resignation of CEO Vikram Pandit and COO John Havens last month.
We maintain a $37 price estimate for Citigroup’s stock, which is in-line with current market price.
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Evident from the list below, Sealink has been going after all the major banks in what looks like a bid to pass off as much of its mortgage-related losses during the economic downturn to them (see Mortgage-Related Lawsuits Continue to Flood the Banks: BoA, JPM & Barclays). The following is a compiled list of the major banks that the institutional investor has filed lawsuits against within a span of one year along with the value of mortgage-backed securities it bought from each bank between 2005 and 2007.
|JPMorgan Chase||$2.4 billion|
|Bank of America||$1.6 billion|
|Deutsche Bank||$960 million|
|Goldman Sachs||$587 million|
|Morgan Stanley||$556 million|
|Credit Suisse||$180 million|
Note: The figure for JPMorgan Chase includes the lawsuit against Bear Sterns by Sealink, and that for Bank of America includes the lawsuits against Merrill Lynch and Countrywide Financials by Sealink.
Sealink is one of the numerous institutional investors who took a cue from the Federal Housing Finance Agency’s (FHFA) series of lawsuits against the banking bigwigs, and forms part of the huge potential threat to the banks because a loss for them against any of the institutional investors will snowball into losses in nearly all these lawsuits because of their identical claims. This could result in significant settlement costs and/or penalties for the banks’ investment banking operations which will consequently drag down margins for the business.
It must be mentioned here that in a number of these lawsuits, Sealink is pressing for damages more than the principal value of the securities they purchased – holding the banks responsible for misleading it into making such huge investments in the first place. While definitely a threat, this rather questionable recourse sought by Sealink has allowed banks to hit back at it – evident from the following statement by Bank of America spokesman Lawrence Grayso late last year: “[Sealink Funding] appears to be another sophisticated investor looking for someone to blame for investment losses suffered due to a downturn in the economy.” Notes:
- Bank of America’s Countrywide Sued by Sealink Funding, Bloomberg, Oct 1 2011 [↩]