JPMorgan Chase late last week rebutted federal claims that it misled four now defunct corporate credit unions into buying $1.5 billion of risky MBS and pointed the finger — as National Credit Union Administration's (NCUA) own internal reviews have — at the management of the failed corporates and at NCUA's own examiners.
“Despite warnings from the offering documents, the news media and even the (NCUA) Board itself, the Credit Unions made the informed decision to plunge the majority of their assets into residential mortgage-backed securities at the height of the housing bubble,” the Wall Street bank said Friday in documents asking a federal court to dismiss an NCUA suit seeking damages for the failed investments. “That investment strategy-which even the (NCUA) Board has condemned as “aggressive”, “excessive” and “unreasonable”—backfired when the housing bubble burst.
The credit unions lost their “unreasonable” wager and subsequently collapsed,” the investment banker argues.
JPMorgan Securities, a unit of the banking giant, is one of three Wall Street firms, along with RBS Securities and Goldman Sachs, being sued by NCUA over the failure of an estimated $50 billion of MBS bought by five corporate credit unions: U.S. Central Federal Credit Union, WesCorp Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union.
In its suit against JPMorgan, NCUA alleges violations of federal and state securities laws and misrepresentations by the firm in the sale of $1.5 billion of MBS to four of the five failed corporates. The suit is filed in U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central.
The failure of the five corporates will cost the credit union movement as much as $20 billion to resolve.
In its defense, RBS said the corporate CUs were sophisticated investors and able to understand the risks of the complicated MBS it sold them. Goldman Sachs has yet to respond to its suit.
JPM claims the multitude of risks were clearly spelled out in offering documents and that the corporates were blinded by their greed for increased profits the risky MBS promised, a claim corroborated by comprehensive material loss reviews conducted by NCUA's own Inspector General. “Ignoring its own assessment of what actually happened, the (NCUA) Board now seeks to blame defendants for the Credit Unions' losses,” says JPM.
JPM mentions in its arguments NCUA claims (in a separate civil suit) that gross negligence by management and directors of WesCorp allowed the one-time $34 billion to load up on risky MBS, which led to its failure.
But in its suit, NCUA claims JPM should have known the MBS, based on loans originated by 11 of the biggest subprime lenders, were doomed to fail.
The originators of those loans included: American Home, Ameriquest, Countrywide, Greenpoint, IndyMac, New Century, NovaStar, Option One, and JPMorgan's own mortgage subsidiaries, Chase Home Finance, Chase Home Mortgage and JPMorgan Chase Bank.