BUSINESS
05/03/2011 08:15 am ET | Updated Jul 03, 2011

Big Banks Sued For $2.2B For Role In Home Loan Company's Bankruptcy

WILMINGTON, Delaware (Tom Hals) - The trustee for bankrupt Thornburg Mortgage Inc has sued Goldman Sachs, Barclays and other big banks for a combined $2.2 billion, blaming them for the former home loan company's bankruptcy.

The trustee filed four separate lawsuits, the most extensive of which blames a "collusive scheme" by units of JPMorgan Chase & Co, Citigroup, Royal Bank of Scotland, Credit Suisse and UBS for driving the company into bankruptcy.

The trustee, Maryland lawyer Joel Sher, accused the five banks of acting together to use a series of unjustified margin calls to extend their control over Thornburg, which was once a leading provider of "jumbo" home loans.

The lawsuit seeks to recover $2 billon for fraudulent conveyances and transfers by the banks, which had financed Thornburg's mortgage-backed securities.

The trustee said the banks eventually drove the Thornburg into Chapter 11 in May 2009. It sought protection from creditors with $36.5 billion in assets, making it one of the larger bankruptcies during the financial crisis.

Citigroup and JPMorgan both said the lawsuit was meritless, and JPMorgan also said it would defend its Bear Stearns unit vigorously.

Credit Suisse and UBS declined to comment. RBS did not immediately return a call for comment.

Sher was appointed to run Thornburg after the company's executives were accused of using Thornburg's staff and offices, without creditors' approval, to start a new company.

The trustee also sued Barclays for improperly seizing mortgage bonds from Thornburg in 2007 by undervaluing the securities in a series of margin calls. The trustee is seeking at least $94 million.

Barclays declined to comment.

Sher sued Goldman Sachs, seeking at least $71 million and accused the bank of scheming to seize hundreds of millions of dollars of investment-grade mortgage bonds that Thornburg had pledged as collateral.

Goldman Sachs declined to comment.

The final lawsuit claims Countrywide Home Loans Inc, which was acquired by Bank of America, breached representations and warranties on the loans it sold to a unit of Thornburg.

Bank of America declined to comment.

That lawsuit was also brought on behalf of a group of investors known as the Zuni Investors LLC, who were represented by David Grais of Grais & Ellsworth.

Grais has brought numerous "putback" lawsuits that seek to have originators such as Countrywide repurchase mortgages that fell short of promised standards but were packaged into mortgage-backed securities and sold as top-notch investments.

Investors holding hundreds of billions of dollars of mortgage bonds have been hoping to shift their losses from the bonds back to the banks that packaged the bonds, but it has been a struggle.

In part, that is because the loans are held in trusts that sold the mortgage bonds. The trustees overseeing the trusts have been reluctant to cooperate with investors and go after the originators of the loans, although that may be changing.

The Thornburg putback lawsuit is based in part on a "joint prosecution agreement" between the mortgage bond trustee and the Zuni investors. Grais said it was the first lawsuit that he knew of that was based on such an agreement.

Thornburg is now known as TMST Inc and the lawsuits were filed as part of the bankruptcy, which is In re TMST Inc U.S. Bankruptcy Court, District of Maryland, No. 09-17787.

(Editing by Steve Orlofsky, Bernard Orr and Richard Chang)

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