JPMorgan Chase & Co. (JPM)’s
rivals may face government lawsuits claiming tens of billions of
dollars in damages tied to investor losses on mortgage bonds after New
York’s attorney general filed a fraud lawsuit against the nation’s
biggest bank by assets.
A state-federal task force set up this year to investigate misconduct in the bundling of mortgage loans into securities will bring other cases, according to New York Attorney General Eric Schneiderman. Investor losses in the JPMorgan case alone will be “substantially more” than the $22.5 billion cited in his complaint, he said.
“We do expect this to be a matter of very significant liability, and there are others to come that will also reflect the same quantum of damages,” Schneiderman said in an interview yesterday with Bloomberg Television’s Erik Schatzker. “We’re looking at tens of billions of dollars, not just by one institution, but by quite a few.”
Schneiderman alleged that the Bear Stearns business that JPMorgan took over in 2008 deceived mortgage-bond investors about defective loans backing securities they bought. Bear Stearns “systematically failed” to evaluate loans, ignored defects uncovered and “kept investors in the dark” about review procedures and problems with the loans.
The Bear Stearns mortgage unit packaged $212 billion in mortgage bonds from 2003 through 2006, according to the state’s complaint. Losses on $87 billion of those bonds packaged during just two of those years total $22.5 billion so far, it estimated.
Countrywide ranked as the top issuer of the securities in 2005, 2006 and 2007, when the worst-performing debt was created, according to Inside MBS & ABS. The lender created $405 billion of the $3.04 trillion of bonds sold in those years.
JPMorgan, with Bear Stearns and Washington Mutual, are facing lawsuits and claims against mortgage-related deals totaling $120 billion, the bank said in a regulatory filing. In the first quarter, JPMorgan had a $2.5 billion pretax expense for additional litigation reserves, mostly mortgage related, a charge that knocked 39 cents a share off its profit. The quarter’s actual litigation expense was $2.7 billion.
As of March 31, the bank estimated its outstanding mortgage repurchase liability at $3.5 billion, an amount already recognized in earnings, according to the quarterly filing. Litigation reserves may need to be increased, although probably not this year, the bank said.
Goldman Sachs Group Inc. (GS), the fifth biggest bank, has had subpoenas and requests for information from state and federal law enforcers and regulators over mortgage-related securitization and subprime mortgages and is co-operating with them in their inquiries, the bank said in its latest quarterly filing.
A Securities and Exchange Commission probe of $1.3 billion of subprime residential mortgage-backed securities underwritten in 2006 by Goldman was ended without enforcement action, the bank said.
Recent filings by Bank of America, the second biggest bank, mention that the bank receives subpoenas without specifying from whom or what for.
Citigroup, Bank of America and JPMorgan each estimated their litigation liabilities might at worst exceed their estimates by $4 billion to $5 billion.
““The language is so vague on what they’re defining in the way of damages, it’s so hard to know,” he said in an interview.
Peabody said his estimate is conservative and based on similar cases by private investors against Bank of America and other lenders, which have generally settled for about 2 percent to 3 percent of the original investment amount.
Since the state’s complaint doesn’t specify the timeframe, number of securities or amount of damages sought, Peabody based his estimate on the peak years of the housing boom from 2005 through 2007. Bear Stearns issued roughly $162 billion in mortgage bonds over those three years, according to Peabody’s calculations.
“It’s very open ended,” Peabody said. “Until you define it, everything is just that, an estimate.”
A settlement could be reached for as little as $2 billion, Peabody said. He raised his estimate for JPMorgan’s third- quarter litigation costs to $1.6 billion from $500 million and cut his estimate for the bank’s earnings, which are scheduled to be released Oct. 12, by 17 percent to 95 cents a share.
The case is People of the State of New York v. J.P. Morgan Securities, 451556-2012, New York State Supreme Court (Manhattan).
http://www.bloomberg.com/news/2012-10-02/jpmorgan-rivals-face-billions-in-damages-after-mbs-case.html
A state-federal task force set up this year to investigate misconduct in the bundling of mortgage loans into securities will bring other cases, according to New York Attorney General Eric Schneiderman. Investor losses in the JPMorgan case alone will be “substantially more” than the $22.5 billion cited in his complaint, he said.
“We do expect this to be a matter of very significant liability, and there are others to come that will also reflect the same quantum of damages,” Schneiderman said in an interview yesterday with Bloomberg Television’s Erik Schatzker. “We’re looking at tens of billions of dollars, not just by one institution, but by quite a few.”
Schneiderman alleged that the Bear Stearns business that JPMorgan took over in 2008 deceived mortgage-bond investors about defective loans backing securities they bought. Bear Stearns “systematically failed” to evaluate loans, ignored defects uncovered and “kept investors in the dark” about review procedures and problems with the loans.
The Bear Stearns mortgage unit packaged $212 billion in mortgage bonds from 2003 through 2006, according to the state’s complaint. Losses on $87 billion of those bonds packaged during just two of those years total $22.5 billion so far, it estimated.
Top Issuers
The top issuers of mortgage securities without government backing in 2005 included Bank of America Corp.’s Countrywide Financial unit, GMAC, Bear Stearns and Washington Mutual, according to trade publication Inside MBS & ABS. Total volume for the top 10 issuers was $672 billion. JPMorgan acquired Washington Mutual in 2008.Countrywide ranked as the top issuer of the securities in 2005, 2006 and 2007, when the worst-performing debt was created, according to Inside MBS & ABS. The lender created $405 billion of the $3.04 trillion of bonds sold in those years.
JPMorgan, with Bear Stearns and Washington Mutual, are facing lawsuits and claims against mortgage-related deals totaling $120 billion, the bank said in a regulatory filing. In the first quarter, JPMorgan had a $2.5 billion pretax expense for additional litigation reserves, mostly mortgage related, a charge that knocked 39 cents a share off its profit. The quarter’s actual litigation expense was $2.7 billion.
As of March 31, the bank estimated its outstanding mortgage repurchase liability at $3.5 billion, an amount already recognized in earnings, according to the quarterly filing. Litigation reserves may need to be increased, although probably not this year, the bank said.
Competitors
Among JPMorgan’s competitors, Citigroup Inc. (C), the third biggest bank by assets, “continues to cooperate fully” with regulators and law enforcers in response to subpoenas and information requests related to its mortgage activities, the bank said in its latest quarterly filing. It didn’t specify the cases.Goldman Sachs Group Inc. (GS), the fifth biggest bank, has had subpoenas and requests for information from state and federal law enforcers and regulators over mortgage-related securitization and subprime mortgages and is co-operating with them in their inquiries, the bank said in its latest quarterly filing.
A Securities and Exchange Commission probe of $1.3 billion of subprime residential mortgage-backed securities underwritten in 2006 by Goldman was ended without enforcement action, the bank said.
Recent filings by Bank of America, the second biggest bank, mention that the bank receives subpoenas without specifying from whom or what for.
Citigroup, Bank of America and JPMorgan each estimated their litigation liabilities might at worst exceed their estimates by $4 billion to $5 billion.
Settlement Estimate
It may cost JPMorgan as much as $3 billion to settle the New York case, although the cost could be higher depending on what the state ultimately requests, said Charles Peabody, a bank analyst with Portales Partners in New York.““The language is so vague on what they’re defining in the way of damages, it’s so hard to know,” he said in an interview.
Peabody said his estimate is conservative and based on similar cases by private investors against Bank of America and other lenders, which have generally settled for about 2 percent to 3 percent of the original investment amount.
Since the state’s complaint doesn’t specify the timeframe, number of securities or amount of damages sought, Peabody based his estimate on the peak years of the housing boom from 2005 through 2007. Bear Stearns issued roughly $162 billion in mortgage bonds over those three years, according to Peabody’s calculations.
“It’s very open ended,” Peabody said. “Until you define it, everything is just that, an estimate.”
A settlement could be reached for as little as $2 billion, Peabody said. He raised his estimate for JPMorgan’s third- quarter litigation costs to $1.6 billion from $500 million and cut his estimate for the bank’s earnings, which are scheduled to be released Oct. 12, by 17 percent to 95 cents a share.
The case is People of the State of New York v. J.P. Morgan Securities, 451556-2012, New York State Supreme Court (Manhattan).
http://www.bloomberg.com/news/2012-10-02/jpmorgan-rivals-face-billions-in-damages-after-mbs-case.html
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