Banks Duped Credit Unions Into Deadly Bonds: Feds

JP Morgan, Royal Bank knew investments were risky: suits
By Rob Quinn,  Newser Staff
Posted Jun 21, 2011 4:41 AM CDT
Banks Duped Credit Unions Into Deadly Bonds: Feds
JP Morgan Chase building sign in Manhattan.   (AP Photo/Bebeto Matthews)

In one of the most aggressive such actions to date, the feds are suing two financial institutions for talking credit unions into bad-risk bonds that ended up destroying the companies. JP Morgan Chase and the Royal Bank of Scotland talked five credit unions into investing in $3 billion in mortgage bonds that were "destined to perform poorly" and that quickly ruined the companies, according to the two suits filed in Kansas by the National Credit Union Administration. The sales pitches and documents provided to the credit unions contained "untrue statements of material fact or omitted to state material facts," making the investments look better than they were, according to the lawsuits.

In fact, the originators of the underlying mortgages "systematically disregarded the underwriting guidelines stated in the offering documents," resulting in securities that "were destined from inception to perform poorly," the suits state. The failure of the five large wholesale credit unions "resulted in the worst crisis faced by the credit-union industry in its history," said NCUA Chairman Debbie Matz. "We believe numerous parties within the chain, primary underwriters and intermediaries as well, have responsibility." Other similar lawsuits are expected soon against as many as eight other banks and security firms that sold the bonds to the credit unions, reports the Wall Street Journal. The current suits seek $800 million which could be used to help troubled credit unions in the future. (More JPMorgan Chase stories.)

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