Federal prosecutors stated Monday that Swiss bank UBS has agreed to pay a total of $1.4 billion in civil penalties for misdeeds and fraud in the sale of residential mortgage-backed securities that date back to the global financial crisis.

The settlement, according to the bank’s own statement released on Monday, deals with a “legacy matter” that dates back to the months of 2006 and 2007 before the financial crisis.

The deal puts an end to the U.S. Department of Justice’s last legal action against some of the biggest financial institutions for making false promises to consumers who bought those mortgage-backed securities. The Justice Department reports that the sum recovered in the cases to date is $36 billion.

When compared to the value of the home mortgages it generated between 2005 and 2007, when it stopped issuing residential mortgage-backed securities, the settlement reached by UBS is almost identical. In a statement issued in 2018 in response to the Justice Department’s accusations, UBS previously claimed that $1.5 billion worth of residential mortgages were generated during those three years.

According to UBS at the time, the majority of the loans supporting the 40 RMBS cited in the lawsuit were originated by other banking institutions.

Investment banks packaged, securitized, and sold bundles of mortgages to institutional buyers in the years before to the financial crisis. Those securities were classified and graded based on their quality, with different “tranches” of mortgages acting as fictitious insurance against the possibility of total default.

But the buyers were unaware that those mortgages were not as good as their ratings would have indicated. UBS knew the mortgages underlying the mortgage-backed securities didn’t meet underwriting criteria, just like other banks who reached settlements with the Justice Department.

Prosecutors claimed that UBS performed “extensive” due diligence on the underlying loans before creating and selling the securities to its clients, and despite being aware of the serious flaws in the products, proceeded to sell them to profitable ends.

The bank claimed that its customers were “highly sophisticated investors” and “some of the biggest financial institutions in the world,” and that it had previously “fulfilled” its responsibilities to them.

In relation to mortgage-backed security vulnerabilities, the Justice Department has reached settlements with 18 additional financial companies, including Bank of America, Citigroup, General Electric, Goldman Sachs, JPMorgan, and Wells Fargo.

The Justice Department and Credit Suisse, the former Swiss bank now owned by UBS, reached a settlement for fraud with MBS offerings.


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