In what is the third lawsuit by the National Credit Union
Administration (NCUA) against
JPMorgan
(
JPM
) since mid-2011, the credit union agency is seeking damages worth
millions from one of the country's biggest bank so that "the people
who caused damage" to credit unions, "pick up (the) burden."
The latest lawsuit is directed against mortgage securities
worth $2.2 billion issued by Washington Mutual (WaMu), well
before it was acquired by JPMorgan in 2008, and comes within weeks
of a similar lawsuit over $3.6 billion in mortgage securities
issued by Bear Stearns, also acquired by JPMorgan in 2008. JPMorgan
was the first bank the NCUA filed charges against over the sale of
faulty mortgage securities (worth $1.4 billion) in June 2011. Since
then, the agency has filed 10 lawsuits in all, against global
investment banking giants including Barclays (
BCS
), Credit Suisse (
CS
), Goldman Sachs (
GS
),
RBS
(
RBS
), UBS (UBS) and Wachovia (acquired by
Wells Fargo
(WFC) in 2008). Deutsche Bank (DB), Citigroup (C) and HSBC (HBC)
avoided lawsuits by entering into multi-million dollar settlements
with the NCUA.
We maintain a $46 price estimate for JPMorgan's shares,
which is around current market prices.
See our full analysis of JPMorgan
The NCUA is charged with the responsibility of overseeing the
sustainability of the nation's credit unions - a mammoth task
considering the fact that there are over 7,500 credit unions across
the country, holding nearly a trillion in assets. But since the
economic downturn of 2008, the NCUA has really had its hands full,
owing to the number of credit unions that have either gone belly
up, or are threateningly close to doing so. And this is largely due
to their billions in exposure to mortgage-backed securities
originated by the global investment banks.
The NCUA has been going after the banking giants since then five
of the nation's biggest credit unions sank in the aftermath of the
recession, alleging that the banks misled the credit unions about
the true nature of underlying mortgages while selling them the
securities. In fact, the NCUA maintains that in quite a few of the
sales, the bank knew well that the mortgages will go bad within
months, but never revealed this information. And as a result almost
all the securities got the highest investment rating of AAA.
These allegations are quite similar to those expressed by retail
and institutional investors around the globe in hundreds of
lawsuits against the banks. And as we have mentioned on numerous
occasions, each lawsuit adds to the burden on banks in terms of
additional legal expenses coupled with a very real possibility of a
multi-million dollar fine.
To put things into perspective, the three lawsuits by the NCUA
against JPMorgan call to question the intention behind
mortgage-backed securities worth $7.2 billion in total. And when
the NCUA filed the first lawsuit (for $1.4 billion in securities),
it expected to recover damages of around $300 million. Working
out the math, damages in the vicinity of $1 billion from all
lawsuits combined seem very plausible. Such a settlement would no
doubt reflect in JPMorgan's investment banking margin for the
period it is incurred. To understand how a reduction in the bank's
margins affects its share price, you can make changes to the chart
below.
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