The National Credit Union Administration (NCUA) has filed suit in Federal District Court in Kansas against J.P. Morgan Securities as successor-in-interest to Washington Mutual Bank, alleging violations of federal and state securities laws in the sale of $2.2bn in mortgage-backed securities to three corporate credit unions.
Other defendants include WaMu Capital Corp., Long Beach Securities Corp., and WaMu Asset Acceptance Corp.
'The damage caused by the actions of firms like Washington Mutual has been extremely expensive to contain and repair, and that job isn’t finished, yet', said NCUA Board Chairman Debbie Matz. 'All the credit unions we supervise and insure have had to share this burden, so it’s only right that the people who caused the damage be required to pick up that burden, as well'.
NCUA’s suit alleges the firms made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate and Southwest Corporate federal credit unions. All three corporate credit unions became insolvent and were subsequently placed into NCUA conservatorship and liquidated as a result of losses from these faulty securities. These failures caused significant losses to the credit union system.
J.P. Morgan Securities acquired Washington Mutual in 2008.
The complaint alleges the firms made numerous misrepresentations and omissions of material facts in the Offering Documents of the securities sold to the failed corporate credit unions. The complaint states underwriting guidelines in the Offering Documents were 'systematically abandoned', and the misrepresentations caused the credit unions to believe the risk of loss was minimal. In fact, these securities were 'significantly riskier than represented in the Offering Documents' and that the faulty securities 'were destined from inception to perform poorly'.
NCUA was the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions. To date, the agency has settled claims worth more than $170m with Citigroup, Deutsche Bank Securities and HSBC.
As liquidating agent for the three corporate credit unions, NCUA has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry.
Recoveries from these legal actions will further reduce the total losses resulting from the failure of the three corporate credit unions. Losses from those failures must be paid from the Temporary Corporate Credit Union Stabilization Fund. Expenditures from this fund must be repaid through assessments against all federally insured credit unions, so any recoveries would help reduce future assessments on credit unions.
Corporate credit unions are wholesale credit unions that provide various services to retail credit unions, which in turn serve consumers, or 'natural persons'. Retail credit unions rely on corporate credit unions to provide them such services as check clearing, electronic payments, and investments.