JP Morgan Chase and Credit Suisse pay $416.9m in penalties over mortgages

Fines and compensation are related to mortgage bond losses regarded as the 'ground zero' of the global financial crisis

guardian.co.uk, Reuters in Washington and New York, Saturday 17 November 2012

JP Morgan Chase will pay $296.9m in penalties while Credit Suisse will pay
$120m over mortgage bond scandals. Photograph: Bebeto Matthews/AP

JP Morgan Chase and Credit Suisse will pay a combined $416.9m (£262.4m) to settle US civil charges that they misled investors in the sale of risky mortgage bonds prior to the 2008 financial crisis, regulators have said.

JP Morgan would pay $296.9m, while Credit Suisse will pay $120m in a separate case, with the money going to harmed investors, the US Securities and Exchange Commission said.

Both settlements addressed alleged negligence or other wrongdoing in the packaging and sale of risky residential mortgage-backed securities (RMBS), including at the former Bear Stearns Co, which JP Morgan bought in 2008. The banks settled without admitting wrongdoing and in separate statements said they were pleased to settle.

"In many ways, mortgage products such as RMBS were ground zero in the financial crisis," SEC enforcement chief Robert Khuzami said in a statement. "Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the US housing market collapsed."

Goldman Sachs in 2010 agreed to pay $550m, also without admitting wrongdoing, to settle SEC charges that it misled investors in a complex mortgage bond transaction.

The enforcement actions are the second and third from a "working group" of federal and state agencies created this year by President Barack Obama to investigate misconduct related to RMBS that contributed to the financial crisis.

Khuzami said the working group was investigating other RMBS transactions.

The SEC accused JP Morgan of materially overstating in a prospectus the quality of home loans that backed a $1.8bn RMBS offering it underwrote in December 2006.

According to the SEC, the largest US bank represented that just four loans were delinquent by 30 to 59 days, when in fact there were more than 620, or about 7% of the total. Investors lost at least $37m as a result, the SEC said.

The regulator also faulted Bear's failure to disclose its having arranged discounted cash settlements with originators that left investors stuck owning many problem loans, rather than forcing the originators to buy the loans back. It said Bear reaped at least $137.8m from the practice.

Credit Suisse failed to disclose similar settlements, which netted $55.7m, the SEC said. The Swiss bank also misled investors by falsely claiming when it would buy back mortgage loans in two offerings in which borrowers had defaulted on their initial payments, and that "all first payment default risk" had been removed, the SEC added.

About $84m of JP Morgan's payout and $39m of Credit Suisse's represented fines. The JP Morgan accord requires approval by a federal judge in Washington DC, while Credit Suisse's case was resolved in an SEC administrative proceeding.

JP Morgan had in June 2011 agreed to pay $153.6m to settle a separate SEC fraud case over its sale of mortgage securities to investors, also without admitting wrongdoing.