Saying that it informed the corporate credit unions of the risks and pointing to the failures of the corporates' executives and the NCUA, J.P. Morgan Securities has asked a federal judge to dismiss the agency's lawsuit against it.
The NCUA Board has failed to prove that the firm made "material misrepresentations'' to the corporate credit unions when selling them residential mortgage backed securities , according to the bank's filing. Instead, J.P. Morgan alleges that the executives of the corporates made the investments despite warnings from the bank and the NCUA that they were risky.
"Despite warnings from the offering documents, the news media and even the (NCUA) 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) board has condemned as 'aggressive, 'excessive' and 'unreasonable' – backfired when the housing bubble burst. The credit unions lost their 'unreasonable' wager and subsequently collapsed,'' according to the filing.
J.P. Morgan Securities, a division of banking giant J.P. MorganChase, noted that the documents it gave to the corporates contained "robust risk disclosures.'' These included warnings that certain credit enhancement features might prove ineffective and that there might be some "noncompliant loans,'' in the pools that didn't comply with the underwriting guidelines.
The NCUA has sued J.P. Morgan Securities, RBS Securities and Goldman Sachs for not fully disclosing the risks when it sold RMBs to the corporates. The collapse of the housing market caused the value of those securities to plummet, leading to massive losses to the corporates.
That convergence of events required the NCUA to rescue some of them, with the help of a loan from the Treasury Department. The credit union system is paying for the rescue through annual assessments. This year's assessment was 25 basis points.
The lawsuit that the NCUA filed against J.P. Morgan in June involves losses stemming from bonds purchased by U.S. Central and three other corporates that the agency conserved and closed: Members United, Southwest Corporate and WesCorp.
The agency isn't alleging fraud but contends that J.P. Morgan made "untrue statements and omissions," including withholding information about a material percentage of the borrowers whose mortgages made up the securities.
To back up its request to dismiss the lawsuit, J.P. Morgan also cites the reports of the NCUA's Office of Inspector General which said that many of the problems of the corporates were the result of failures by their executives and an overly aggressive investment strategy.
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