Commentary The Intangible Costs of Bankruptcies
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JPMorgan Rivals Face Billions in Damages After MBS Case
JPMorgan Chase & Co.'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, Bloomberg News reported yesterday. 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 yesterday. "We're looking at tens of billions of dollars, not just by one institution, but by quite a few."
Bank-Friendly U.S. Regulator Shifts Focus to Revamp Reputation
The new Comptroller of the Currency (OCC) -- long seen as the most bank- friendly of U.S. regulators -- is changing course, Bloomberg News reported today. Since Thomas Curry took over the OCC in March, at least two key staff members closely associated with the agency’s pro-industry stance have departed, notably chief counsel Julie Williams. Curry has also raised the profile of consumer protection and shifted focus toward “operational risk” -- the idea that bank practices and management can pose as much of a threat to safety and soundness as external forces. Curry arrived at the Office of the Comptroller of the Currency in March after eight years on the board of the Federal Deposit Insurance Corp, and a number of his recent staff changes have the result of making the OCC look more like the FDIC. Retiring OCC chief of staff John Walsh was replaced by Paul Nash -- a top deputy to former FDIC chairman Sheila Bair who also served on the staff of Sen. Tim Johnson(D-S.D.), who is now Senate Banking Committee chairman. Curry also tapped Ken Kilber, his deputy at the FDIC, who is now detailed to the OCC on a temporary assignment.
U.S. Role in Lehman Collapse Allowed in Reserve Primary Fund Trial
U.S. District Judge Paul Gardephe ruled that the U.S. government's role in the collapse of Lehman Brothers Holdings Inc. will be allowed as evidence in the Oct. 9 trial over allegations that Reserve Primary Fund misled investors in 2008, Bloomberg News reported yesterday. The company will be permitted to present evidence that its confidence in Lehman's finances were based in part on the U.S. Securities Exchange Commission’s oversight of the investment bank under a voluntary regulatory program, according to Judge Gardephe's decision. A trial is scheduled to begin Oct. 9 in the SEC’s case alleging that the company misled investors about the safety of the fund after it suffered losses in Lehman investments. The fund, which held $785 million in debt issued by Lehman, became the first money fund in 14 years to expose investors to losses when Lehman filed for bankruptcy protection in September 2008.
Ally Concerned ResCap Sale Could Impede Mortgage Deal
Ally Financial Inc. is worried that the proposed sale of Residential Capital LLC's mortgage-servicing platform might hamstring ResCap's promise to abide by the terms of a landmark national mortgage settlement, Dow Jones Daily Bankruptcy Review reported today. Ally, ResCap's government-controlled parent, on Friday expressed concerns about whether Nationstar Mortgage LLC would fulfill ResCap's obligations under the settlement if it wins a coming auction for the bankrupt company's mortgage-servicing portfolio. Nationstar, a subsidiary of Fortress Investment Group, has been named the lead bidder in that contest, with a $2.5 billion bid. According to Ally, the tentative sale deal with Nationstar does not spell out that the prospective purchaser will "honor and perform all of the debtors' obligations" under a settlement the nation's largest mortgage lenders struck with the Department of Justice and scores of state attorneys general over alleged violations in mortgage origination and foreclosure practices. Ally said that it will not back the transaction unless ResCap's settlement responsibilities are preserved.
NY Attorney General Says More Suits Will Follow JPMorgan
New York Attorney General Eric Schneiderman said that the lawsuit over mortgage-backed securities against JPMorgan Chase & Co. will serve as a template for suits against other issuers, Bloomberg News reported yesterday. Schneiderman alleged that the Bear Stearns business that JPMorgan bank took over in 2008 deceived mortgage-bond investors about the defective loans backing securities they bought, leading to “monumental losses,” according to a complaint filed yesterday in New York State Supreme Court. The Bear Stearns mortgage unit packaged $212 billion in mortgage bonds from 2003 through 2006, according to the complaint. Losses on $87 billion of those bonds packaged during just two of those years total $22.5 billion so far, it estimated. Schneiderman said that he wants the bank to disgorge all money it obtained in connection with or as a result of the alleged fraud.
Delays Hamper U.S. Government Loans to Green Energy Projects
A year after the U.S. government raced to meet a deadline to finish loan agreements with dozens of clean energy companies, less than half the total money promised has been handed over, Reuters reported yesterday. Technical questions and companies' own failures in hitting contractual milestones are behind some of the holdups. But government officials fearful of taking a risk on firms that could collapse may have also caused some of the delays. The political firestorm after the failure of Solyndra, a solar panel maker that went bankrupt last year after receiving more than $527 million in a government loan, may have made the authorities wary, industry experts and investors say. The Energy Department and some companies say that the pace of disbursement reflects an appropriately cautious approach to handling taxpayer investment in nascent industries. In some cases, though, the rigid approval process for drawing on loans has frustrated recipients, who feel the government is withholding cash due to minor setbacks.
Changes in Mortgage Servicing Practices Take Effect Today
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JPMorgan Sued by N.Y. for Fraud Over Mortgage Securities
JPMorgan Chase & Co., the biggest U.S. bank, was sued by New York Attorney General Eric Schneiderman, who alleged that the Bear Stearns business the bank took over in 2008 defrauded mortgage-bond investors, Bloomberg News reported today. Investors were deceived about the defective loans backing securities they bought, leading to "monumental losses," Schneiderman said in a complaint filed yesterday in New York State Supreme Court. "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," Schneiderman’s office said. Schneiderman in January was named co-chairman of a state-federal group formed to investigate misconduct in bundling of mortgage loans into securities leading up to the financial crisis. The group includes officials from the U.S. Justice Department, the Securities and Exchange Commission, the FBI and other federal and state officials.
Computer Attacks on Six Banks Frustrate Customers
Six major American banks were hit in a wave of computer attacks last week, by a group claiming Middle Eastern ties, that caused Internet blackouts and delays in online banking, the New York Times reported today. Frustrated customers of Bank of America, JPMorgan Chase, Citigroup, U.S. Bank, Wells Fargo and PNC, who could not get access to their accounts or pay bills online, were upset because the banks had not explained clearly what was going on. The banks suffered denial of service attacks, in which hackers barrage a Web site with traffic until it is overwhelmed and shuts down. Such attacks, while a nuisance, are not technically sophisticated and do not affect a company's computer network, or, in this case, funds or customer bank accounts.