The state of New York filed suit against JPMorgan Chase and its subsidiary JPMorgan Securities on Monday over the allegedly fraudulent sales of mortgage-backed securities ahead of the US financial crisis.
New York’s attorney general accused the bank and the securities unit, which at the time was the separate Bear Stearns & Co, of systematically selling the residential mortgage-backed securities (RMBS) as carefully evaluated and structured products, when in fact they were slapped together with little regard to quality or viability.
The suit accused JPMorgan Chase, the then-Bear Stearns and a third company, EMC Mortgage, of lying to buyers of the securities over the quality of their underlying assets, which were hundreds of thousands of home mortgages.
The attorney general said the fraudulent marketing of the RMBS from 2005 to 2007 caused losses of US$22.5 billion, 26 percent of their original face value.
“Defendants led investors to believe that Defendants had carefully evaluated — and would continue to monitor — the quality of the loans in their RMBS,” the suit said.
“In fact, Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans,” it added. “As a result, the loans in Defendants’ RMBS included many that had been made to borrowers who were unable to repay, were highly likely to default, and did in fact default in large numbers.”
Bear Stearns collapsed in 2007 to 2008, the first major casualty of the financial crash that was rooted in the imploding housing sector.
JPMorgan Chase took the company over in March 2008 in a deal organized by the US Federal Reserve to prevent the imploding investment bank’s losses from pulling down other banks.
The New York attorney general called for the court to force disgorgement of earnings and benefits on the sales of the RMBS, pay restitution to investors and order defendants to pay unspecified damages.