JPMorgan Chase (NYSE:JPM) finds itself in the eye of the storm yet again with New York Attorney General Eric Schneiderman filing a lawsuit against the country’s biggest bank in what appears to be a last-ditch effort by U.S. regulators to make it pay for its role in fueling the housing bubble that led to the economic recession of 2008.  The lawsuit – a first by the Residential Mortgage-Backed Securities Working Group formed by President Obama earlier this year – targets the bank’s Bear Sterns unit for misleading investors into buying mortgage-backed securities (MBS) worth billions in 2006 and 2007 while being fully aware that the underlying mortgages were likely to default. And Schneiderman’s statement that this lawsuit will act as a “workable template” only means that we can expect more of them against competitors including Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) in coming months. We maintain a $45 price estimate for JPMorgan’s shares, which is about 10% above its current market price.
Since the economic downturn, major banks have been plagued by a long list of mortgage-related lawsuits filed against them by individual and institutional investors as well as regulatory bodies alleging that the banks originated and sold mortgage bonds worth billions despite being aware that the mortgages they were securitizing were essentially worthless. Other mortgage practices prevalent in the run up to the 2008 economic crisis which have also come under fire in various lawsuits are the practice of robo-signing new mortgages without verifying the borrower’s credit condition, and of selling faulty mortgages to the government enterprises Fannie Mae and Freddie Mac.
The series of 17 lawsuits filed by the Federal Housing Finance Agency (FHFA) against some of the world’s biggest financial institutions for mis-selling loans to Fannie Mae and Freddie Mac – demanding a refund for loans worth almost $200 billion in total (see Legal Woes Continue for Bank of America). The FHFA lawsuit against JPMorgan addresses loans worth about $33 billion from this total.
There Is More To The Lawsuit Than Meets The Eye
The latest lawsuit against JPMorgan poses a bigger problem than all those it is already facing because of the fact that it is backed by the government. The political interest in the lawsuit would make it more difficult for the bank to get off the hook easily.
But what one can’t dismiss is that the first concrete action by the state-federal group formed by President Obama this January follows months of investigation and questioning by senate-backed panels into the multi-billion dollar hedging loss that JPMorgan reported this May. The highly political nature of the inquiry leads us to believe that the timing of these charges against JPMorgan’s Bear Stearns unit cannot be merely a coincidence.
Although the lawsuit does not specify the damages it seeks from JPMorgan, it represents a multi-billion dollar liability to the banking group due to the magnitude of the fraud it alleges. And as the lawsuit would potentially spawn a series of similar lawsuits against the other major banks, the banking sector is most likely looking at another round of expensive settlements which will cost billions over the coming quarters.Notes: