JP Morgan Sued Over $3.6B of Bear Stearns MBS

The National Credit Union Administration (NCUA) has brought suit against J.P. Morgan Securities and Bear, Stern and Company over the failure of four corporate credit unions.  The suit, filed in Federal District Court in Kansas alleges violations of federal and state securities laws in the sale by Bear, Stearns of $3.6 billion in mortgage-backed securities (MBS) to the failed institutions.

NCUA charges that Bear, Stearns made numerous misrepresentations and omissions of material facts in the offering documents of the securities.  Underwriting guidelines in the offering documents were "abandoned" the complaint charges, and the misrepresentations caused the credit unions to believe the risk of loss was minimal.  In fact, these securities were "significantly riskier than represented" and "routinely overvalued." The faulty securities, NCUA contends, "were destined from inception to perform poorly."  J.P. Morgan is party to the suit because it bought Bear Stearns at a virtual fire sale in 2008 when it became apparent that the securities firm could not survive because of its mortgage-related losses. 

The four credit unions that bought the securities and subsequently failed were U.S. Central, Western Corporate, Southwest Corporate and Members United Corporate federal credit unions.  NCUA insures its member credit unions through a fund similar to that of the Federal Deposit Insurance Corporation and it said the failures caused significant losses to the credit union system.

"Bear, Stearns was one of several Wall Street firms that sold faulty securities to corporate credit unions, leading to their collapse and enormous losses across the industry," said NCUA Board Chairman Debbie Matz. "Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting. They packaged these securities and then told buyers the paper was sound. When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions."

NCUA has eight similar actions pending against Barclays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, and Wachovia but said the Bear, Stearns suit is the largest it has ever brought "to date."

NCUA said that recoveries from the various legal actions will further reduce the total losses suffered through the institutions' failures.  These losses must be paid from the Temporary Corporate Credit Union Stabilization Fund which must be repaid through assessments against all federally insured credit unions

 "NCUA and credit unions have successfully worked together to restore stability to the credit union system," Matz said. "Now we are holding responsible parties like Bear, Stearns accountable for their actions. It's the right thing to do."