NCUA Sues J.P. Morgan and Bear, Stearns Over Faulty Securities

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NCUA Sues J.P. Morgan and Bear, Stearns Over $3.6 Billion in Faulty Securities

Legal Action is the Agency’s Largest to Date against Wall Street Investment Firms

NCUA has eight similar actions pending against Barclays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, and Wachovia.

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 $170 million with Citigroup, Deutsche Bank Securities and HSBC.

ALEXANDRIA, Va. (Dec. 17, 2012) – The National Credit Union Administration (NCUA) has filed suit in Federal District Court in Kansas against J.P. Morgan Securities and Bear, Stearns & Co., alleging violations of federal and state securities laws in the sale of $3.6 billion in mortgage-backed securities to four corporate credit unions.

NCUA’s suit — the largest the agency has filed to date—alleges Bear, Stearns & Co. made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate, Southwest Corporate and Members United Corporate federal credit unions.

All four 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 purchased Bear, Stearns & Co. in 2008, after the demise of Bear, Stearns & Co.

“Bear, Stearns was one of several Wall Street firms that sold faulty securities to corporate credit unions, leading to their collapse and enormous losses across the industry,” said NCUA Board Chairman Debbie Matz. “Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting. They packaged these securities and then told buyers the paper was sound. When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions.”

The complaint alleges Bear, Stearns & Co. 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 “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” and “routinely overvalued.” The faulty securities, the complaint states, “were destined from inception to perform poorly.”

As liquidating agent for the four 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.

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.

NCUA Sues J.P. Morgan and Bear, Stearns Over $3.6 Billion in Faulty Securities

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The Real Fiscal Cliff: How to Spot the Ledge

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Peter Schiff

The Real Fiscal Cliff: How to Spot the Ledge | Peter Schiff

Archived from the live Mises.tv broadcast, this lecture by Peter Schiff was presented at the Mises Circle in Manhattan: "Central Banking, Deposit Insurance, and Economic Decline." Includes an introduction by Llewellyn H. Rockwell, Jr. Music by Kevin MacLeod.

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USA Banks Loan Charge-Offs Increase

The USA Banks Loan Charge-Off Rate of +1.18% for the quarter ended September 30, 2012 is the first increase after 10 consecutive quarterly decreases (from QE 3-31-10 thru QE 6-30-12). The financial crisis losses have been mostly worked off - at least the worthless credits the regulators have identified and ordered written-off.

Total Loans increased by +1.4% from the prior QE June 30, 2012. However, banks are more risk-averse than before the 2008 USA financial system crisis and the Great Recession that officially ended the QE June 30, 2009. Therefore, Loan Charge-Offs should continue to level off at a relatively lower rate or even decease further as loan underwriting standards are more conservative. The Net Charge-Off Rate is still high compared to historical rates.

USA Banks Net Charge-Off Rate by Quarter The USA Banks Net Charge-Off Rate increased to 1.18% for quarter ended September 30, 2012, which is the first increase since the QE December 31, 2009 at 2.89%. The Net Charge-Off Rate peaked at that quarter, during the USA financial system crisis.



USA Banks Net Charge-Off Rate by Segment For the 9 months ended September 30, 2012, the annualized Net Charge-Off Rates by segments were:
All institutions +1.15%
Credit card banks +3.94%
International banks +1.53%
Agricultural banks +0.22%
Commercial lenders +0.75%
Mortgage lenders +0.78%
Consumer lenders +1.45%
Other specialized (< $1 billion total assets) +0.33%
All other (< $1 billion total assets) +0.41%
All other (> $1 billion total assets) +0.98%

Loan Losses Decline Across Most Loan Categories (FDIC Quarterly Banking Profile, December 4, 2012) For the ninth quarter in a row, net charge-offs (NCOs) were lower than a year earlier. Banks charged off $22.3 billion (net) during the quarter, $4.4 billion (16.5 percent) less than in third quarter 2011. The largest NCO declines occurred in credit cards (down $2.8 billion, or 30.4 percent), and in real estate construction loans (down $1.4 billion, or 61 percent). Charge-offs declined in all major loan categories except 1-4 family residential real estate loans, where NCOs were $1.3 billion (15.5 percent) higher than a year earlier. This increase was the result of new accounting and reporting guidelines applicable to national banks and federal savings associations concerning the reporting of restructured loans.

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USA Banks Return on Assets at Post-Crisis High

USA Banks Return on Assets of +1.02% for the nine months ended September 30, 2012 signals continued improvement in profitability and ongoing stability in the banking system. There were 7,181 financial institutions reporting. The prior year, the nine months ended 9-30-11, was +0.92%. The current ROA is the highest since the full-year 2006 (+1.28%).

Return on assets reflects the overall performance, and health, of the banking system and takes into account all of the income statement components, including net interest margins, loan loss provisions, operating expenses, and income taxes. Return on assets also indicates how effectively and efficiently assets are being deployed and if the asset mix is ultimately profitable. An ROA of +1.00% is a banking benchmark.

USA Banks Return on Assets by Year The USA Banks Return on Assets (ROA) was +1.28% for the years ended 2004, 2005, and 2006. The ROA decreased to +0.81% and +0.03% in 2007 and 2008, respectively. The ROA then turned negative to -0.07% in 2009, before rebounding to +0.65% in 2010 and +0.88% in 2011.



USA Banks Return on Assets by Segment For the 3 months ended September 30, 2012, the Annualized ROA by banking segments were:
All institutions +1.06%
Credit card banks +3.19%
International banks +0.99%
Agricultural banks +1.36%
Commercial lenders +0.92%
Mortgage lenders +0.75%
Consumer lenders +1.67%
Other specialized (< $1 billion total assets) +1.42%
All other (< $1 billion total assets) +1.05%
All other (> $1 billion total assets) +1.01%

Quarterly Profits Continue to Improve (FDIC Quarterly Banking Profile, December 4, 2012) Reduced expenses for loan losses and rising noninterest income helped lift insured institutions’ earnings to $37.6 billion in third quarter 2012. This quarterly net income represents a $2.3 billion (6.6 percent) improvement over third quarter 2011, and is the highest quarterly total reported by the industry since third quarter 2006. The average return on assets (ROA) rose to 1.06 percent, from 1.03 percent a year earlier. More than half of all institutions (57.5 percent) reported higher earnings than a year ago, and only 10.5 percent reported negative net income for the quarter. This is the lowest proportion of unprofitable institutions in more than five years (since second quarter 2007).

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FDIC Deposit Insurance Fund Balance at 4-Year High

FDIC Deposit Insurance Fund The FDIC Deposit Insurance Fund (DIF) balance and related Provision for Insurance Losses (PIL) indicate continued improvement through the 3 months ended September 30, 2012. During the 2008 financial system crisis and the Great Recession, the Provision for Insurance Losses increased, and therefore the DIF decreased, as a result of bank failures and the resulting costs of seizure and liquidation. However, the FDIC problem bank list remains very high which indicates ongoing bank failures and DIF costs. Bank failures and the related charts of total failures and cost to the FDIC Deposit Insurance Fund are posted as occurring on this blog.

FDIC Deposit Insurance Fund by Quarter The FDIC Deposit Insurance Fund balance was +$25.2 billion at the quarter ending 9-30-12. This is the 6th consecutive quarterly positive balance, after 7 consecutive negative quarters, and a 16-quarter high. The peak balance was +$52.84 billion at QE 3-31-08. This was before the 2008 USA financial system crisis and Great Recession. The low balance was -$20.86 billion at the QE 12-31-09. The Provision for Insurance Losses (PIL), the cost of seizing and liquidating failed banks, was a negative -$84 million at QE 9-30-12. The PIL peaked at +$21.69 billion for the QE 9-30-09. Prior to the QE 3-31-08, the PIL was an immaterial amount, positive or negative, of less than $100 million each quarter.



DIF Balance Continues Positive (FDIC Quarterly Banking Profile, December 4, 2012) The condition of the Deposit Insurance Fund (DIF) continues to improve. The DIF increased by $2.5 billion during the third quarter to $25.2 billion (unaudited), the eleventh consecutive quarterly increase. Accrued assessment income increased the fund by $2.8 billion. A negative provision for insurance losses and unrealized gains on available-for-sale securities added $91 million to the fund balance. Operating and other expenses, net of other revenue, reduced the fund by $393 million. For the first nine months of 2012, 43 insured institutions failed, with combined assets of $9.5 billion, at a current estimated cost to the DIF of $2.3 billion. The DIF reserve ratio was 0.35 percent at September 30, up from 0.32 percent at June 30, 2012, and from 0.12 percent four quarters ago.

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FDIC Problem Banks List Decreases to 3-Year Low

The FDIC problem banks list decreased by 38 to 694 at September 30, 2012 for the 6th consecutive quarterly decline and a 3-year low. The total continues very high, but has dropped below 700 after 11 consecutive quarters above. If the problem banks list has in fact peaked and continues a downtrend, then bank failures will also continue decreasing accordingly over time. Bank failures and the related charts of total failures and cost to the FDIC Deposit Insurance Fund are posted as occurring on this website.

There were 7,181 financial institutions reporting and the problem banks list of 694 represents 9.66% of the total and a 11-quarter low. This is down from 10.10% in the prior QE 6-30-12 and down from the peak of 10.72% for the QE 3-31-11. In a healthy economy and banking system, less than 1% of financial institutions are on the problem banks list and this can be as low as 0.50% (1/2 percent).

FDIC Problem Banks by Quarter The FDIC problem banks list peaked at 888 at March 31, 2011. The total problem banks remain elevated but is decreasing. The problem banks list has decreased 6 consecutive quarters, after increasing 18 consecutive quarters (from Q4 2006 through Q1 2011). The total assets of the problem banks from the year-ends 2004 through 2011 (in billions) were $28, $7, $8, $22, $159, $403, $390, and $319, respectively. The total assets of the current (9/30/2012) 694 problem banks is $262 billion, or an average of $378 million in total assets per problem bank. The FDIC reports the total problem banks on a quarterly basis.



Failures Fall to Lowest Level Since the End of 2008 (FDIC Quarterly Banking Profile, December 4, 2012) The number of insured institutions reporting financial results declined from 7,245 to 7,181 in the quarter. Mergers absorbed 49 insured institutions, and 12 institutions failed. This is the smallest number of failures in a quarter since fourth quarter 2008. For a fifth consecutive quarter, no new charters were added. The last time a start-up bank opened was in fourth quarter 2010. The number of institutions on the FDIC’s “Problem List” fell from 732 to 694, while assets of “problem” banks declined from $282.4 billion to $262.2 billion. This is the smallest number of “problem” institutions since third quarter 2009. The number of full-time equivalent employees at insured financial institutions declined by 2,352 (0.1 percent) from the previous quarter.

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Peter Schiff: Fed Chair Bernanke Throws US Dollar Over the Currency Cliff!

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Peter Schiff

Ben Bernanke Throws the Dollar Over the Currency Cliff

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