Legal issues continue to plague the banking sector, with the most recent now focused on New York based JP Morgan Chase & Co. (NYSE: JPM). CIFG Assurance North America Inc. has dragged the company to court over losses suffered by the former on collateralized debt obligations (CDOs) created by Bear Stearns.
CIFG alleges that Bear Stearns, which JPMorgan acquired at the height of the financial crisis in 2008, had stashed the CDOs with risky mortgage securities and convinced the former that independent firms have selected the collateral. As a result, CIFG agreed to provide the financial-guaranty insurance. As a result, enormous losses (estimated to be around $100 million) were passed on to CIFG when those mortgage securities defaulted. CIFG filed the lawsuit in the New York State Supreme Court in Manhattan.
This is not the only lawsuit of it’s kind. Last week, it sued the Charlotte based Bank of America (NYSE: BAC) for fraudulent representations and breach of contract over insurance policies tied to residential mortgage backed securities. The bond insurer alleged that BofA issued misleading statements that concealed the associated risks and influenced it to provide insurance worth over $150 million to make these marketable to investors. As a result of these fraudulent representations by BofA, CIFG will have to shell out nearly $170 million in damages. CIFG filed the lawsuit relating to the issue in the New York State Supreme Court in Manhattan.
The Bear Stearns acquisition, once seen as a steal and a testament to Chief Executive Jamie Dimon’s ingenuity, may not end up being as rewarding as initially thought. The company is passing through a rough patch with the litigation overhang. Apart from the aforementioned lawsuit, JPMorgan is also facing money-laundering probe and many other legal hassles related to the sale of mortgage-backed securities. However, on the brighter side, the ill-effects of these are likely to be eliminated by the strong fundamentals of the company.
The banking sector seeks to rebound from the depths of the recession, but the prolonged implementation of new regulations and constant new lawsuits continue to plague the industry. The lawsuits very well may ultimately be found in the bank’s favor, but mounting legal bills and public perception may be damaged along the way.
