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The $885-million UBS AG settlement with the Federal Housing Finance Agency is a big win for Edward DeMarco. As head of the U.S. agency that oversees Fannie Mae and Freddie Mac, he has become one of the most reviled regulators inside the beltway. The legal victory should earn him some well-deserved respect.
The lawsuit against UBS is only the third to settle among the 18 that FHFA filed in 2011 against lenders for allegedly selling Fannie and Freddie a bill of goods during the height of the housing bubble. And the Swiss bank was hardly the biggest player. The $4.5-billion (U.S.) of allegedly dodgy bonds it sold to the housing agencies are a small fraction of the $200-billion at issue in the lawsuits.
Bank of America Corp. may be the bank with the most to lose, having bought subprime lender Countrywide and brokerage firm Merrill Lynch. The two were among the biggest participants in Wall Street's game of dressing up low-quality home loans as top rated bonds. FHFA reckons all three peddled some $58-billion in questionable paper. The UBS payout – about one fifth the amount of the bonds the bank sold – suggests BofA could theoretically be on the hook for as much as $12-billion.
The lenders' losses, however, should be taxpayers' gain. Though Fannie and Freddie will split the UBS settlement, they'll probably give it to the U.S. Treasury, because they are already profitable. That could mean as much as $40-billion ultimately flowing into government coffers, assuming all the banks reach agreements even close to UBS's deal.
That's real money, the kind regulators like the Securities and Exchange Commission can only dream of raking in. Mr. DeMarco's unusual decision to hire top law firm Quinn Emanuel Urquhart & Sullivan to sue on the FHFA's behalf may have had something to do with the suit's success. Legal fees will reduce taxpayers' cut, but the payoff seems worth it.
Mr. DeMarco will still have detractors. Many resent, for instance, his refusal to slash the principal amount of Fannie and Freddie-held mortgages that exceeded the value of homes. With the real estate market on the rise, however, he may finally win some applause for sticking it to the banks.