JPMorgan Chase & Co
. (
JPM
) became the latest financial institution to face legal charges
from bond insurer, CIFG Assurance North America Inc. CIFG has
dragged the company to court over losses suffered by the former
on collateralized debt obligations(CDOs) created by Bear Stearns.
The lawsuit is based on CIFG's financial-guaranty insurance,
which was provided to credit default swaps, guaranteeing payment
on notes issued by ACA ABS CDO 2006-2 Ltd. and Libertas Preferred
Funding II Ltd. These were structured financial investments
created by Bear Stearns.
CIFG alleges that Bear Stearns (acquired by JPMorgan in 2008) had
stashed the CDOs with risky mortgage securities and convinced the
former that independent firms have selected the collateral. As a
result, CIFG agreed to provide the financial-guaranty insurance.
Consequently, huge losses - estimated to be around $100 million -
were passed on to CIFG when those mortgage securities defaulted.
CIFG filed the lawsuit in the New York State Supreme Court in
Manhattan.
Apart from JPMorgan, CIFG has also pressed similar charges
against a couple of other financial institutions. Last week, it
sued
Bank of America Corporation
(
BAC
) for fraudulent representations and breach of contract over
insurance policies tied to residential mortgage backed securities
(RMBS).
The bond insurer alleged that BofA issued misleading statements
that concealed the associated risks and influenced it to provide
insurance worth over $150 million to make these marketable to
investors. As a result of these fraudulent representations by
BofA, CIFG will have to shell out nearly $170 million in damages.
CIFG filed the lawsuit relating to the issue in the New York
State Supreme Court in Manhattan.
Other lawsuits include last month's $277 million court case
against GreenPoint Mortgage Funding Inc. and last year's $275
million legal charge against
The Goldman Sachs Group Inc.
(
GS
).
JPMorgan continues to face problems related to Bear Stearns'
acquisition, which it made at the height of the financial crisis.
The company is passing through a rough patch with the litigation
overhang.
Apart from the aforementioned lawsuit, JPMorgan is also facing
money-laundering probe and many other legal hassles related to
the sale of mortgage-backed securities. However, on the brighter
side, the ill-effects of these are likely to be eliminated by the
strong fundamentals of the company.
JPMorgan currently retains a Zacks #2 Rank, which translates into
a short-term Buy 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 Zacks Rank. However, considering the fundamentals, we
maintain a long-term 'Neutral' recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis
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GOLDMAN SACHS (GS): Free Stock Analysis
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JPMORGAN CHASE (JPM): Free Stock Analysis
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