We may not have a pro or BCS-league football team, but when it comes to financial shenanigans Memphis is in the big time, at least in the eyes of federal regulators.
For the second time in a year, a Memphis financial firm has earned national attention if not a national rating for its prowess in the once wildly popular mortgage-backed securities industry. First it was Morgan Keegan, which settled with the Securities Exchange Commission for $200 million. Now First Horizon has been named a world-class miscreant by the federal housing regulator known to none-and-all as the Federal Housing Finance Agency (FHFA).
Eat your hearts out, Nashville and St. Louis. In a front-page story in the Wall Street Journal Saturday, Memphis-based First Horizon is among the chosen in lawsuits against “17 of the world’s biggest financial institutions.” Also on the elite list are Bank of America (assets of $2.5 trillion), Citigroup ($1.9 trillion in assets), Goldman Sachs, and J.P. Morgan Chase & Co. First Horizon is the plucky underdog in the group, with just $25 billion in assets.
Why anyone would take a bank’s asset valuation seriously these days is one for Ripleys. Investors apparently don’t. First Horizon’s stock value peaked at $40 a share in 2007 and has fallen to about $6 a share. And if you don’t understand banking and collateralized debt obligations, don’t worry. Regulators and Fannie Mae and Freddie Mac apparently don’t either, or at least the lawsuit says they didn’t figure it out for years until it was too late.
The charge: First Horizon and its subsidiaries were on an expansion kick in 2005-2007 and packaged mortgages into sellable securities without divulging the crummy credit quality of some of them. Not unlike the rap against Morgan Keegan and its so-called Kelsoe funds.
“Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans,” says the FHNA lawsuit.
“The Registration Statement contained statements about the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investor’s decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to
Fannie Mae and Freddie Mac, these statements were materially false.”
Named in the lawsuit are Gerald ‘Jerry’ Baker, CEO of First Horizon from 2007-2008 when he retired after a quarter in which the company lost $19 million, and Charles Burkett, who retired in June 2011 as president of banking at First Tennessee.
First Horizon, once known as First Tennessee, has had a succession of leaders since Ron Terry was CEO from 1973-1995. They include Ralph Horn, 1994-2002; Ken Glass, 2003-2007, Baker from 2007-2008; and Bryan Jordan, 2008-present. It is the last home grown “Big Three” Memphis bank since Union Planters and National Bank of Commerce were acquired by other companies.
The 77-page lawsuit is dense but includes some interesting details suitable for Labor Day weekend reading.