JPMorgan Chase & Co.
) is being investigated by the Department of Justice (DOJ) and
the Securities and Exchange Commission (SEC) over the sale of
risky residential mortgage backed securities (RMBS). This was
disclosed by the company in its latest quarterly filings with the
In May 2013, JPMorgan received a notice from the Civil Division
containing the preliminary inquiry's conclusion. The conclusion
stated that the company had violated several federal securitiy
laws at the time of selling RMBS during 2005-2007. Additionally,
the company has received several subpoenas and requests for
information from federal and state authorities related to
origination of mortgages and the sale of RMBS.
The regulators are scrutinizing as to whether JPMorgan made
proper disclosures to the investors at the time of sale of MBS.
Probes are also being conducted for potential infringement of
securitization representations and warranties as well as due
diligence related to RMBS.
Further, JPMorgan is being investigated by the civil and criminal
divisions of the Attorney's Office for the Eastern District of
California relating to MBS that were sold during 2005-2007.
Apart from these, JPMorgan is facing inquires from the Office of
the Comptroller of the Currency (OCC) and the Consumer Financial
Protection Bureau (CFPB). These regulators are investigating the
company's practices related to the collection and sale of credit
Notably, these are among several other lawsuits that JPMorgan
faces related to its conduct preceding the financial crisis.
Given this, at the end of second-quarter 2013, the company raised
its projection of legal losses to $6.8 billion from $6.0 billion
in the prior quarter.
The law enforcement agencies have taken an aggressive approach
towards penalizing those responsible for the collapse of the
financial market in 2008. Earlier this week, the DOJ and the SEC
filed 2 separate civil lawsuits against
Bank of America Corp.
) related to the sale of $850 million worth of RMBS in 2008.
Many other global banks including
The Goldman Sachs Group, Inc.
) are facing investigations and lawsuits related to the sale of
risky MBS during the period prior to the financial crisis.
If following the completion of the investigation, the DOJ and the
SEC file lawsuits against JPMorgan, it would inevitably lead to
further rise in litigation costs and affect the bank's image as
well as financials.
Though the overall impact from such lawsuits is yet to be
evaluated, these measures are somewhat reassuring as these are
aimed at resisting malpractices related to the sale of MBS. Most
importantly, such measures will likely impart the much needed
transparency to banking procedures concerning the sale of MBS.
Currently, JPMorgan carries a Zacks Rank #2 (Buy).
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