NEW YORK – The New York attorney generals office has hit JPMorgan Chase & Co. with a civil lawsuit, alleging that Bear Stearns perpetrated massive fraud related to billions of dollars in residential mortgage-backed securities that it sold before its 2008 collapse and subsequent sale to the New York bank.
The lawsuit is the first to be filed under the auspices of the RMBS Working Group, which was set up by President Obama to investigate and prosecute alleged misconduct that contributed to the financial crisis.
Subprime mortgages were sold to people with less-than-ideal credit. Many of them began defaulting on their loans when the housing bubble burst and their introductory teaser interest rates shot up, making their payments unaffordable. Because many of those mortgages were sliced and repackaged as securities that could be bought and sold – known as RMBS – the mass defaults led to huge losses at large U.S. banks and other financial firms, helping fuel the global economic meltdown.
New York Attorney General Eric T. Schneiderman is alleging that Bear Stearns led its investors to believe that the loans in its RMBS portfolio had been carefully evaluated and would be continuously monitored. Schneiderman alleges that Bear Stearns failed to do either, resulting in investors buying securities backed by mortgages that borrowers couldnt repay and defaulted on in huge numbers.
The complaint further alleges that even when Bear Stearns executives were made aware of these problems, the firm failed to correct its practices or disclose material information to investors. The executives routinely overlooked negative findings and continued to package the loans into securities for sale to investors, it says.
Investors have so far lost $22.5 billion on more than 100 subprime securities that Bear Stearns issued in 2006 and 2007, according to the complaint. Thats over one-quarter of the original principal balance of $87 billion.