National Credit Union Administration (NCUA) filed suits this morning against JPMorgan Chase and RBS Securities claiming fraud in the sale of billions of dollars in private-label MBS the two investment firms sold to the five failed corporate credit unions.
In separate suits NCUA claims violations of federal and state securities laws and misrepresentations in the sale of hundreds of securities. Additional law suits may follow in order to recover losses from the purchase of securities that caused the failures of five corporates.
NCUA is in the process of securitizing $50 billion of toxic MBS sold by Wall Street to the five corporate failures, U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU. The failures are projected to cost NCUA, which is passing the costs on to all credit unions, as much as $20 billion to resolve.
As liquidating agent for the failed corporate credit unions, NCUA said it has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.
"NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions," said NCUA Board Chairman Debbie Matz. "NCUA's legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions. By these actions we intend to hold responsible parties accountable. The first two actions involve damages in excess of $800 million. We expect to file additional actions and seek a total amount of damages in the billions of dollars. Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions."
NCUA's suits claim the sellers, issuers and underwriters of the questionable securities made numerous material misrepresentations in the offering documents. These misrepresentations caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial. The corporate credit unions invested in MBS that experienced dramatic, unprecedented declines in value, effectively rendering the institutions insolvent. These suits are the culmination of lengthy investigations into the circumstances surrounding the purchases of these securities.