JPMorgan Chase & Co.
) continues to be in troubled waters due to litigation issues
arising from the sale of mortgage-backed securities (MBS) by the
entities it acquired during the financial crisis. In less than a
month's time, the company has been again sued by the U.S.
regulator for credit unions - National Credit Union
Administration (NCUA) - for misrepresentation in the underwriting
and sale of MBS worth over $2.2 billion.
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The aforesaid MBS were sold to the U.S. Central, Western
Corporate and Southwest Corporate federal credit unions (FCUs) by
Washington Mutual - acquired by JPMorgan in 2008. Later, these
three FCUs became insolvent and were placed under NCUA
conservatorship and then liquidated due to the losses from these
Washington Mutual has been accused by NCUA of issuing misleading
statements and omitting important details from the offering
documents of the MBS in question. This led to obscurity regarding
the risks associated with the MBS when these were sold.
The credit unions perceived these to be less risky; when in fact,
the securities were substantially risky in nature. Moreover, it
has been alleged that Washington Mutual ignored the underwriting
guidelines specified in the offering documents.
As a result, when these MBS lost their value for defaults in the
underlying assets, the value of investments of the credit unions
in these MBS plummeted. Subsequently, the three credit unions
collapsed, triggering a crisis in the credit union industry.
Similar Charges Earlier
This is the third time that JPMorgan has been sued by NCUA. In
December 2012, the company was charged for misrepresentation in
the underwriting and sale of MBS worth over $3.6 billion. The
aforesaid MBS were sold to the U.S. Central, Western Corporate,
Southwest Corporate and Members United Corporate federal credit
unions by Bear Stearns & Co.
Likewise, in June 2011, JPMorgan along with
Royal Bank of Scotland PLC
) was accused of defrauding five large credit unions by selling
more than $3 billion worth of high-risk MBS. NCUA seeks to
recover about $840 million in losses at five wholesale credit
unions through these lawsuits.
Further, many other global giants including
Credit Suisse Group
Goldman Sachs Group Inc.
Wells Fargo & Company
) are facing similar lawsuits from NCUA. Moreover, to date, NCUA
reached settlements with
Deutsche Bank AG
HSBC Holdings plc
) worth about $171 million.
Such cases are inevitably going to result in mounting litigation
risks for JPMorgan, which pose a menace for both its image as
well as financials. On the other hand, recoveries by NCUA would
result in lowering of losses that stemmed from the failure of the
Though the overall impact from such lawsuits is yet to be
perceived, these measures are somewhat reassuring as these are
aimed at resisting malpractices related to selling MBS. Most
importantly, such measures would impart much needed transparency
to banking procedures at the time of the sale of MBS.
Currently, JPMorgan retains a Zacks #3 Rank, which translates
into a short-term Hold rating. We believe that on account of such
litigation overhangs, there is little possibility of any upward
estimate revisions; hence, the stock is expected to hold its
current rank. Moreover, we maintain a long-term 'Neutral'
recommendation on the stock.