WICHITA, Kan. – NCUA this morning sued Bear Stearns & Co., now a unit of JP Morgan Chase, over the sale of mortgage-backed securities to four corporate credit union failures, the 11th Wall Street bank targeted for culpability for the corporate debacle.
Like the other actions, the new suit, filed in U.S. District Court for the District of Kansas—home to U.S. Central FCU—alleges that Bear, which has since been acquired by JP Morgan, violated its own underwriting standards by packaging subprime mortgages into $3.6 billion of highly rated MBS that failed soon after their issuance, causing hundreds of millions of dollars in losses for the corporates. The suit, like the others, carefully avoids allegations of fraud in the packaging of the MBS, a difficult claim to prove, but says Bear Stearns was guilty of negligence.
“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 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.”
The failure of the five corporates, U.S. Central, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution FCU, left NCUA, as liquidating agent for the failures, saddled with more than $50 billion of MBS on which it has projected losses of about $20 billion. The losses are being paid for by credit unions as part of the credit union regulator’s corporate credit union resolution. NCUA hopes to recover some of those costs from the civil suits against the Wall Street banks.
The allegations are similar to those contained in civil suits NCUA has also filed against JP Morgan, RBS Securities, Goldman Sachs, UBS Securities, Barclay’s Capital, Credit Suisse First Boston and Wells Fargo’s Wachovia Capital Markets unit. NCUA has also reached out-of-court settlements over similar allegations with Citibank, HSBC and Deutsche Bank Securities.
As with all of the previous suits, a main question surrounding the latest action is whether NCUA acted too late to satisfy the relevant statutes of limitations for securities sold as long ago as 2005.
Bear Stearns was one of the biggest underwriters of MBS and collapsed under the weight of bad bets in the mortgage market in the fall of 2008, before it was acquired at a steep discount by JP Morgan.
The new suit alleges Bear made numerous misrepresentations and omissions of material facts in the offering documents of the securities sold to the failed corporate credit unions. The complaint states underwriting guidelines in the offering documents were “abandoned” 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, the complaint states, “were destined from inception to perform poorly.”