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FDIC Says Wall Street Defrauded Colonial

In August 2009, agents of the U.S. Treasury and FBI hauled off records from Colonial BancGroup’s high-rise office tower in Orlando, Fla., one week prior to the FDIC’s liquidation of what was then Alabama’s second largest bank.

In August 2009, agents of the U.S. Treasury and FBI hauled off records from Colonial BancGroup’s high-rise office tower in Orlando, Fla., one week prior to the FDIC’s liquidation of what was then Alabama’s second largest bank.

Photo by Phelan Ebenhack

On August 10 the Federal Deposit Insurance Corp. filed three suits in Montgomery Circuit Court and in U.S. District Court in New York against eight of the largest international investment banks, alleging securities fraud that contributed to the 2009 collapse of Colonial BancGroup.

Named as defendants in the complaint by the FDIC are Bank of America, Merrill Lynch, Citicorp Mortgage Securities, Citigroup Financial Products, Credit Suisse Securities (USA) LLC, J. P. Morgan Securities, RBS Securities, UBS Securities, HSBC Securities and a host of mortgage servicing companies, including Countrywide.

The three suits allege that 31 mortgage-backed securities sold to Colonial were sold in criminal violation of the Alabama Securities Act and the U.S. Securities Act of 1933. The complaints say the defendants lied about the credit quality of the loans that backed the securities, including loan-to-value ratios and the number of properties that were not primary residences. The 31 securities were worth a total of $816 million, and the FDIC says it can prove that more than 50 percent of the mortgages that backed them were fraudulently represented. The three suits together call for damages of not less than $425.5 million.

Colonial BancGroup, then the second largest bank in Alabama, was put into receivership by the FDIC in 2009, shut down with $25.4 billion in assets. It is the third largest bank failure in the U.S. since 2008, the first full year of the financial crisis. 

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