JPMorgan Chase and Credit Suisse have agreed to settlements with the Securities and Exchange Commission totaling $417 million over their packaging and sale of troubled mortgage securities to investors, the agency said Friday. The settlements are the latest major penalties extracted by the agency in a broad investigation into the way Wall Street firms bundled mortgages into complex investments before the financial crisis.
The S.E.C. has leveled claims against a handful of major banks, including JPMorgan and Credit Suisse, that they painted a deceptively rosy portrait of the securities while some of the underlying loans were already showing signs of delinquency.
Robert Khuzami, director of the S.E.C.’s Division of Enforcement, called mortgage products like those sold by the banks “ground zero in the financial crisis” in a statement Friday. The S.E.C. cautioned Wall Street to brace itself for more enforcement actions.
While the S.E.C. has brought more than 100 cases related to the financial crisis, the agency has won only piecemeal victories against the banks, and has not yet secured a big victory against any individuals responsible for some of the reckless behavior. In a significant setback for the agency, a federal jury in August acquitted a Citigroup manager whom the S.E.C. had accused of misleading investors in the sale of a complex security made up of residential mortgages.
Mr. Khuzami on a conference call Friday acknowledged the challenge of bringing cases against individuals related to “structured” financial products, but noted that “we are by no means are shying away from charging individuals.”
JPMorgan and Credit Suisse did not admit or deny guilt. JPMorgan agreed to pay $296.9 million to settle the charges and Credit Suisse agreed to pay $120 million.
The S.E.C. brought the cases in conjunction with the federal-state mortgage task force, which President Obama created in January to investigate the subprime mortgage morass. In its first major salvo against banks, the group sued JPMorgan last month. That federal lawsuit is still pending.
Separately, the federal regulator that oversees the housing finance giants Fannie Mae and Freddie Mac filed lawsuits against 17 financial firms last year over nearly $200 billion in mortgage-backed securities that imploded after the loans soured.
Legal wrangling over Wall Street’s behavior during the housing boom has targeted virtually every step in the process, from making loans to borrowers with tarnished credit to the sale of securities engineered with the subprime loans. As a result of the mortgage-litigation storm, banks have had to set aside billions of dollars to deal with claims from investors and regulators.
The S.E.C.’s investigation into JPMorgan included creating troubled securities itself, as well as misleading investors through its Bear Stearns unit, the troubled investment bank it purchased at the urging of the federal government in 2008.
In a December 2006 sale of $1.8 billion of mortgage-backed securities, JPMorgan played down delinquency rates of the mortgages used as collateral in the securities, according to the S.E.C. Despite assurances by JPMorgan that only .04 percent of the loans were more than 30 days delinquent, roughly 7 percent of the loans were troubled, the agency said. While the bank reaped $2.7 million as part of the deal, investors didn’t fare as well, losing at least $37 million, according to the S.E.C.
The S.E.C. also faulted Bear Stearns for pocketing compensation it received from mortgage lenders for shoddy loans that the firm had purchased to package into mortgage securities. Bear Stearns, the agency claimed, never passed that money on to investors in the securities. As a result, Bear Stearns received $137.8 million, the agency said Credit Suisse was also accused of keeping roughly $55.7 million in such payments from investors. The Swiss bank was also faulted by the agency for misstating when it would buy back mortgages if homeowners fell behind on their payments.
In a statement Friday, JPMorgan said that it was pleased to “put these matters” behind it. Credit Suisse also expressed relief, noting that the bank was “committed to the highest standards of integrity and regulatory compliance in all its businesses.”
The S.E.C. said it would distribute the money to investors harmed by banks’ practices.
Despite the settlement, JPMorgan is still dogged by mortgage-related headaches. The mortgage task force case filed last month by the New York attorney general, Eric Schneiderman, asserted that Bear Stearns sold securities between 2006 and 2007 that caused roughly $22.5 billion in lossesfor investors.
In another mortgage feud, JPMorgan is one of the 17 firms that the Federal Housing Finance Agency claims sold shoddy loans to the government without adequately disclosing the risks. In court filings, JPMorgan has pushed for the lawsuit to be thrown out.
Beyond the government actions, JPMorgan and other Wall Street banks face an onslaught of battles with private investors. Dexia, a Belgian-French bank, for example, sued JPMorgan in federal court in Manhattan over $1.6 billion in troubling mortgage-backed securities bought from Bear Stearns and Washington Mutual.
In a statement Friday, Kenneth Lench, who is the head of the S.E.C.’s enforcement division’s structured and new products unit, said “these actions demonstrate that we intend to hold accountable those who misled investors through poor disclosures in the sale of RMBS (residential mortgage backed securities) and other financial products commonly marketed and sold during the financial crisis.” He added: “Our efforts in that regard continue.”
2 Banks Settle With S.E.C. on Mortgage Securities
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2 Banks Settle With S.E.C. on Mortgage Securities
