UBS will pay $885 million in a settlement with a U.S. regulators over allegations the Swiss bank misrepresented mortgage-backed bonds during the housing bubble, paving the way for billions more to be paid by other banks.
The Federal Housing Finance Agency, which oversees government-sponsored housing enterprises Fannie Mae and Freddie Mac, said late on Thursday UBS must pay $415 million to Fannie Mae and $470 million to Freddie Mac to resolve claims related to securities sold to the companies between 2004 and 2007.
Other European banks, including Royal Bank of Scotland and Barclays, and U.S. banks including JP Morgan and Bank of America could face costly settlements. RBS was the worst performing of European banks on Friday, shares falling 2.5 percent by 0930 GMT (5:30 a.m. EDT).
Fannie Mae and Freddie Mac were seized by the U.S. government in 2008 as the housing crisis threatened their solvency. They have received $187 billion in taxpayer funds to stay afloat.
UBS is just one of 18 banks the FHFA pursued in 2011 for allegedly misrepresenting the quality of the collateral backing securities during the run-up to the financial crisis. The regulator is seeking to recover losses on mortgage bonds sold to Fannie Mae and Freddie Mac.
UBS is the third to settle, after Citigroup and General Electric settled for undisclosed sums. The details of the deal announced by the regulator on Friday follow a statement by UBS on Monday that said it had reached an agreement and had adequately for the payout without specifying how much was involved.
The FHFA said it "remains committed to satisfactorily resolving the remaining suits as well" and the deal may lay down a marker for how much it could cost rival banks.
Estimates on the overall sums involve vary widely.
Analysts at Credit Suisse earlier this year said European banks could take an $11 billion hit from a raft of mortgage-related litigation costs in the United States.
They estimated RBS alone could face an FHFA litigation loss of $1.6 billion, Barclays a $1.1 billion loss and HSBC could take a $900 million loss.
But another London-based analyst, Joseph Dickerson at investment bank Jefferies, said he expected RBS's losses to be "sub-$1 billion". "I would say that $4.2 billion seems to be a complete non-sequitur".
Other banks have acknowledged they could incur losses from the suits but few have said how much it could cost.
Barclays said in its last annual report if it lost the cases against the FHFA and other civil actions it could incur a loss of up to the outstanding amount of the RMBS at the time of judgment and some additional interest and costs, less the market value of the RMBS.
It said the outstanding amount was $2.7 billion at the end of 2012, and estimated the market value was $1.6 billion.
Deutsche Bank has set aside 2.4 billion euros for litigation costs after topping that up in March by an additional 600 million euros, mainly related to lawsuits over its role in selling bonds backed by U.S. sub-prime mortgages.
HSBC said in its annual report it was unable to estimate reliably the financial effect of any action or litigation, but any claims "could be significant."
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