The National Credit Union Administration (NCUA), a government regulator, has filed a lawsuit against Morgan Stanley, Barclays, JPMorgan, Credit Suisse, Royal Bank of Scotland Group, and UBS for selling fraudulent mortgage-backed securities to credit unions. The sales of these securities amounted to $2.7 billion. Goldman Sachs, Wachovia, Wells Fargo, and Ally Securities also allegedly sold faulty securities according to one of the credit unions involved in the lawsuit.

Southwest and Members United corporate credit unions paid more than $416 million for the securities in question in the Morgan Stanley suit and more than $1.9 billion for securities sold by the other defendants.

The NCUA lawsuits filed in the Manhattan district court say the banks made misrepresentations in connection with the underwriting and subsequent sale of the mortgage-backed securities. NCUA’s complaints also allege that the offering documents of the securities sold to the failed corporate credit unions contained statements that were not true or omitted material facts.

The suit comes in the wake of the small lenders collapsing from losing billions on the faulty mortgage bonds the Wall Street banksters sold them. The suit will hopefully recover some lost funds for the credit union system.

…the corporate credit unions became insolvent, placed into NCUA conservatorship and later liquidated as a result of losses from the faulty bonds — causing significant losses to the credit union system, according to the organization…

According to complaints, the originators systematically abandoned the state underwriting guidelines in the offering documents, resulting in the securities being significantly riskier than represented.

If the NCUA prevails in the suit the credit unions that failed will likely remain closed but the insurance funds and overall industry could benefit from both the recovered funds and the understanding made to Wall Street that selling fraudulent securities to credit unions will not be tolerated. We will have to see how the lawsuit plays out and whether Wall Street gets the message.