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."