Pennsylvania says big banks fixed GSE bond prices


WASHINGTON — More than a dozen of the world’s largest banks have been accused of a price-fixing scheme of roughly $486 billion in bonds issued by the mortgage giants Fannie Mae and Freddie Mac.

A lawsuit filed by Pennsylvania State Treasurer Joseph Torsella alleges that the banks, including Bank of America, Deutsche Bank, JPMorgan Chase, Citigroup and Goldman Sachs, “colluded to manipulate prices” in the secondary market for Fannie and Freddie bonds “to extract supra-competitive profits for themselves at the expense of Commonwealth Funds and Class members.”

“Defendants’ conspiracy systematically raised their profits earned from dealing FFBs at the expense of their customers — investors who traded FFBs with Defendants and who were repeatedly overcharged and underpaid due to Defendants’ anticompetitive conduct,” the suit alleges.

Signage in front of the Fannie Mae and Freddie Mac headquarters.

Bloomberg News

The suit is the second of its kind. The City of Birmingham Retirement and Relief System and the Electrical Workers Pension System filed a joint suit last month making similar allegations. Both lawsuits were first reported by Law360.

From March 2010 through April 2014, the banks collectively underwrote roughly $486 billion in Fannie and Freddie bonds, approximately 64% of the total bonds underwritten during the period, according to Pennsylvania’s class action suit, which was filed in the U.S. District Court for the Southern District of New York.

Specifically, the suit alleges the banks agreed to charge inflated prices for newly issued Fannie and Freddie bonds that they sold to investors after acquiring them from the mortgage giants. It also suggests that the banks coordinated to inflate the prices of older Fannie and Freddie bonds in the days prior to each new bond issuance.

“This acted to drive the market price of new FFBs artificially higher by establishing an inflated benchmark for comparison so that Defendants could earn excess, unlawful profits once they had new FFB inventory to sell,” according to the suit.

Rather than competing with each other for investors’ Fannie and Freddie bond transactions, the banks allegedly agreed to inflate the prices at which they sold the bonds to investors, or deflated the price at which they purchased them from investors, or both, the suit says.

The bank’s behavior was observed to “statistically diminish” after April 2014 in the wake of the London interbank offered rate scandal, when banks’ fixed-income operations were more heavily scrutinized, the suit says.

The suit claims that the conspiracy between the banks injured investors who were drawn to Fannie and Freddie bonds for their “safety and liquidity.”

“These injuries included, but were not limited to, paying artificial and non-competitive prices for FFBs as a proximate result of Defendants’ anticompetitive conduct,” the suit says. “Commonwealth Funds and the Class were also deprived of the benefits of free and open competition in the FFB market.”

The plaintiffs are seeking damages for the violations and “permanent injunction restraining Defendants from engaging in additional anticompetitive conduct.”

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