WICHITA, Kan. (11/2/11)—J.P. Morgan Securities last week asked the U.S. District Court for the District of Kansas to dismiss the National Credit Union Administration's (NCUA) securities sale-related suit, saying that the agency is "ignoring its own assessment" of what led to the corporates failures and is instead blaming JP Morgan for the corporate credit unions' losses.
The NCUA in its suit claims that J.P. Morgan sold a combined $1.5 billion of questionable residential mortgage-backed securities (RMBSs) to corporate credit unions, making numerous material misrepresentations in the offering documents. These misrepresentations caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial, the agency added. The corporates' investment in these RMBSs, and the eventual declines in value, effectively rendered the corporates insolvent, the NCUA said.
The NCUA filed the suit earlier this year as liquidating agent of U.S. Central FCU, Western Corporate FCU, Members United Corporate FCU, and Southwest Corporate FCU.
Calling the corporates "major players in the mortgage industry," J.P. Morgan in its motion to dismiss said the credit unions "were familiar with the risks associated with the mortgage loans backing their RMBS and the lending practices used to originate those loans." The J.P. Morgan response also cited a recent NCUA Office of the Inspector General report that found the corporates "should have recognized the risk exposure that [their] significant concentration in mortgage-backed securities represented earlier than 2007 and 2008" and "should have been more vigilant about investing so heavily in higher risk residential mortgage loans taken out by borrowers with the questionable ability to repay the mortgages".
"Despite warnings from the offering documents, the news media and even the Board itself, the Credit Unions made the informed decision to plunge the majority of their assets into residential mortgage-backed securities at the height of the housing bubble. That investment strategy—which even the [NCUA] has condemned as 'aggressive', 'excessive' and 'unreasonable'—backfired when the housing bubble burst," J.P. Morgan said.
The agency has requested nearly $2 billion in combined damages from Goldman Sachs, RBS Securities and J.P. Morgan. The agency has brought four lawsuits and said earlier this year that it expects to take an additional five to 10 actions. Credit Union National Association (CUNA) General Counsel Eric Richard said that these Wall Street firms have the potential to provide significant reimbursement of the credit union system's losses, but reclaiming these losses may be a long, difficult process for the NCUA.
The NCUA said any recoveries from these legal actions would reduce the total losses resulting from the failure of the five corporate credit unions and would help to reduce the amount of future corporate credit union stabilization fund assessments on credit unions. NCUA Deputy Executive Director Larry Fazio earlier this year said the agency would need to charge between $7 billion and $9 billion in future assessments to pay for the remaining losses from troubled assets at corporates, and added that he could not predict how long the NCUA would need to continue charging Temporary Corporate Credit Union Stabilization Fund assessments.