|Copyright:||A.M. Best Company, Inc.|
Liberty Mutual Insurance Co. has filed a securities fraud lawsuit against Goldman, Sachs & Co. to recover losses on $62.5 million of investments in Fannie Mae, a portfolio segment that the insurer claims is now “virtually worthless.”
The Boston-based insurer claims it was misled by Goldman Sachs regarding preferred stock offerings in Fannie Mae that occurred in September 2007 and again in December 2007, according to the lawsuit.
The lawsuit, filed July 9 in the U.S. District Court of Massachusetts, claims Goldman Sachs allegedly took steps to alter its own real estate investment strategy in late 2006 and throughout 2007. The lawsuit alleges that the investment banking firm anticipated difficulties in the subprime mortgage market and sought to protect itself by selling or unwinding its own exposure. Goldman Sachs generated a $4 billion profit on bets it made against the real estate market, according to the lawsuit.
Goldman Sachs was also the underwriter on the sale of Fannie Mae preferred stock in 2007, a move geared toward raising surplus capital that would strengthen the government-sponsored enterprise’s balance sheet. According to the lawsuit, Fannie Mae was severely under-capitalized at the time and “needed to complete the sale of preferred stock just to stay in business.”
Goldman Sachs allegedly either knew or recklessly disregarded several key aspects of federal lender’s condition, including:
— The overstated value of Fannie Mae’s investments in residential-backed mortgage securities;
— Fannie Mae’s loan loss reserves of less than 1%;
— And Fannie Mae’s “deferred tax asset, which could not be transferred and was inflated beyond any real world value.”
Goldman Sachs spokesman Michael Duvally said the lawsuit was “entirely without merit and we will contest it vigorously.” He declined any further comment on the case.
Liberty Mutual spokesman Rich Angevine said the company does not comment on matters that are in litigation.
According to an A.M. Best special report, the U.S. insurance industry’s investments in securities issued by Fannie Mae and Freddie Mac totaled about $371 billion as of year-end 2007 (BestWire, Aug. 18, 2008).
The U.S. property/casualty industry’s total exposure to securities issued by the two government-sponsored enterprises, which add liquidity to the mortgage market, represented 23% of year-end 2007 policyholder surplus. According to the special report, the property/casualty industry’s exposure totaled about $115.5 billion as of year-end 2007.
Also named as plaintiffs in the case are Liberty Mutual Fire Insurance Co., Peerless Insurance Co., Safeco Corp. and Liberty Life Assurance Co. of Boston.
Liberty Mutual Insurance Cos. currently has a Best’s Financial Strength Rating of A (Excellent).
(By Al Slavin, senior associate editor, BestWeek)