JPMorgan Chase & Co. rebutted claims that it misled four failed corporate credit unions into buying $1.5 billion of risky mortgage-backed securities, and instead pointed the finger at the management of the failed corporates and National Credit Union Administration's own examiners.
JPMorgan Securities, a unit of the banking giant, is one of three Wall Street firms, along with RBS Securities and Goldman Sachs, being sued by the NCUA over the failure of an estimated $50 billion of MBS bought by five corporate credit unions — U.S. Central Federal Credit Union, WesCorp Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union. The failure of the five corporates will cost the credit union industry as much as $20 billion to resolve, according to estimates.
In its suit, the NCUA claims that JPMorgan should have known the MBS, based on loans originated by 11 of the biggest subprime lenders, were doomed to fail. The suit is filed in U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central.
But JPMorgan claims that the multitude of risks of the securities it sold the corporates were clearly spelled out in offering documents and that the corporates were blinded by their greed for increased profits the risky MBS promised, a claim corroborated by comprehensive material loss reviews conducted by NCUA's own Inspector General.
"Despite warnings from the offering documents, the news media and even the (NCUA) board itself, the credit unions made the informed decision to plunge the majority of their assets into residential mortgage-backed securities at the height of the housing bubble," the Wall Street bank said Friday in documents asking a federal court to dismiss the suit. "That investment strategy — which even the (NCUA) board has condemned as 'aggressive, 'excessive' and 'unreasonable' — backfired when the housing bubble burst. The credit unions lost their 'unreasonable' wager and subsequently collapsed."
In fact, JMorgan points out that the NCUA claims in a separate civil suit that gross negligence by management and directors of WesCorp in allowing the $34 billion-asset corporate credit union to load up on risky MBS was the cause of the WesCorp failure.
But Morgan says its offering documents disclosed the very risks that the NCUA alleges were concealed. For example, NCUA claims that the offering documents were misleading because some underlying loans in the MBS did not comply with the applicable underwriting guidelines. But the offering documents disclosed that there would be noncompliant loans in the pools and provided an express mechanism by which such loans could be repurchased or replaced.
In its defense, RBS Securities has said that the corporate were sophisticated investors and able to understand the risks of the complicated MBS it sold them. Goldman Sachs has yet to respond to its suit.
The NCUA does not comment on pending litigation.
This story first appeared on the website of the The Credit Union Journal, a sister publication.
