JPMorgan and Morgan Stanley Are Still Paying for Mortgage Mess-Ups

Dirty Money


The National Credit Union Association, an independent federal agency tasked with oversight of federal credit unions, said Tuesday that it filed suit against a battery of major financial institutions for violations of federal and state antitrust laws, as well as the fraudulent sale of securities. Banks accused of wrongdoing include JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Credit Suisse (NYSE:CS), Barclays (NYSE:BCS), and Goldman Sachs (NYSE:GS).

The news came in two salvos. First, the agency announced that it filed suit in a federal district court in Kansas against 13 international banks, alleging that the firms violated antitrust laws when they manipulated interest rates through the London Interbank Offered Rate (Libor) system. The NCUA claims that manipulation of Libor rates facilitated the failure of five corporate credit unions: U.S. Central, WesCorp, Members United, Southwest, and Constitution. (You can read the complaint here.)

NCUA Board Chairman Debbiew Matz explained: “We have a responsibility to pursue recoveries through every available avenue against those who caused billions of dollars in losses to credit unions. Some firms were manipulating international interest rates in a way that cost the five corporates to lose millions of dollars. Just as we are doing in our other suits, we are seeking to hold responsible parties accountable for their actions.”

The credit agency claims that the 13 firms accused of interest-rate manipulation deliberately — whether individually or collectively — gave false information and acted in bad faith in order to “benefit their investments that were tied to LIBOR, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness, and to deprive investors of the interest rate payments to which they were entitled.”

A number of investigations have been launched into the issue in both the U.S. and the U.K., and the NCUA adds yet another federal-level investigation to the mix. The three firms that have successfully been penalized by authorities so far — UBS (NYSE:UBS), Royal Bank of Scotland (NYSE:RBS), and Barclays — are all cited for wrongdoing in the NCUA complaint. Adding JPMorgan in the complaint adds another straw to the mountain of litigation already facing the firm.

The second salvo was the announcement that the NCUA had filed nine lawsuits against nine separate banks in federal district court in New York over the fraudulent sale of nearly $2.4 billion in mortgage-backed securities to corporate credit unions. The NCUA claims that the failure of the five credit unions is pretty much directly attributable to the failure of these securities. (You can find the list of complaints here.)

The organization explains: ”NCUA’s suits allege the firms made misrepresentations in connection with the underwriting and subsequent sale of the mortgage-backed securities. The corporate credit unions became insolvent, were subsequently placed into NCUA conservatorship and later liquidated as a result of losses from these faulty securities. These failures subsequently caused significant losses to the credit union system.”

The agency continued: “NCUA’s complaints allege the offering documents of the securities sold to the failed corporate credit unions contained statements that were not true or omitted material facts. The originators systematically abandoned the stated underwriting guidelines in the offering documents, according to the complaints, with the result that the securities were significantly riskier than represented.”

Morgan Stanley alone is accused of selling more than $416 million in securities to the credit unions, while $1.9 billion in securities were purchased from other defendants, including JPMorgan and Barclays. The case against Morgan Stanley appears to be the largest individual suit out of the nine.

The  National Credit Union Association was established in 1970 by the U.S. Congress and serves as a kind of clearing house for federal credit unions. According to the NCUA, there were 6,681 federally insured credit unions in the U.S. as of this June, down from 7,239 in June 2011. The industry claims 95.2 million members with $1.06 trillion in total assets, or an average of $158.1 million for any given credit union.

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