U.S. mortgage lawsuit, European fears drive preferreds lower; RBS topples on lawsuit concerns

By Stephanie N. Rotondo

Portland, Ore., Sept. 6 - Preferred stocks were bleeding in Tuesday trading as European fears and a mortgage-related lawsuit in the United States stoked the fire.

"Everything is following the lead in Europe," one trader said. "And there's no lead there."

"Part of what was driving Europe was concern [about] the mortgage lawsuits from Fannie and Freddie," another market source said. Europe's own issues were also playing a role, he said.

"So it just kind of fed itself to a certain degree," he added.

None felt the pressure so much as Royal Bank of Scotland Group plc. Several of the bank's preferreds were down 6% or more for the day. Among other foreign issuers, ING Groep NV was also suffering.

With mortgages on the brain, the concerns of the market also dragged down mainstays like Ally Financial Inc. and Bank of America Corp.

Overall, traders reported light volume for the day. One market source noted that some players were still away on vacations.

"That doesn't help matters," he said.

RBS preferreds plummet

A trader said RBS "was hit pretty bad today," fueled by a lawsuit filed against 17 lenders by the Federal Housing Finance Agency - the regulator of Fannie Mae and Freddie Mac - last week.

The 6.08% non-cumulative guaranteed trust preferreds, series G (NYSE: RBSPG), were the day's biggest percentage loser, dropping 69 cents, or 6.63%, to $9.71. The 6.25% non-cumulative guaranteed trust preferreds, series I (NYSE: RBSPI) also made the list, falling 64 cents, or 6.07%, to $9.91.

The 5.9% non-cumulative guaranteed trust preferreds, series E (NYSE: RBSPE), declined 62 cents, or 6%, to $9.72.

"Anything below $10.00 is not good," a market source said.

On Friday, the FHFA announced a lawsuit against 17 lenders aimed at recovering losses on $196 billion of mortgage-backed securities bought by Fannie Mae and Freddie Mac. RBS is on that list of lenders and reportedly sold a significant amount of the securities in question.

But RBS was not the only foreign issuer to feel the pinch. ING Groep's 8.5% perpetual hybrid capital securities (NYSE: IGK) dipped 30 cents, or 1.23%, to $24.09.

Barclays Bank plc's 8.125% series 5 non-cumulative callable dollar preference shares (NYSE: BCSPD) were also weaker, falling 37 cents, or 1.49%, to $24.54.

Ally, BofA sink

Ally Financial and Bank of America were also named in FHFA's lawsuit, with Bank of America holding the biggest bag. That comes as no surprise, as headlines for months have seemed to indicate that the bank's liability in the mortgage debacle would be significantly higher than others.

The lack of surprise didn't stop either company's preferreds from sinking.

Ally's 8.5% series A preferreds (NYSE: ALLYPA) were the busiest of the day, with nearly 1.6 million preferreds changing hands. They fell 49 cents, or 2.33%, to $20.50.

Bank of America's 8.2% series H depositary shares (NYSE: BACPH) were also active, with over half a million shares moving around. They dropped 53 cents, or 2.18%, to $23.74.

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