JPMorgan units concealed the truth about the poor quality of the loans underlying the securities and knew that credit ratings misrepresented their risk, BayernLB said in a lawsuit filed yesterday in New York State Supreme Court.
“This misconduct has resulted in astounding rates of default on the loans,” BayernLB said. Most of the securities have been downgraded to junk, it said.
The lender said it believed the mortgage securities were safe investments based on representations about the quality of loans and credit ratings when it invested almost $2.1 billion in 57 offerings from 2005 to 2007, according to the complaint. The lawsuit names JPMorgan and other units of the New York-based bank as defendants.
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment on the lawsuit.
The case is Bayerische Landesbank New York Branch v. Bear Stearns & Co., 653239/2011, New York State Supreme Court, New York County (Manhattan).
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BayernLB or Bayerische Landesbank (Bavarian State Bank) is a publicly regulated bank based in Munich, Germany and one of the eight Landesbanken. It is 94% owned by the free state of Bavaria (indirectly via BayernLB Holding AG) and 6% owned by the Sparkassenverband Bayern, the umbrella organization of Bavarian Sparkassen. With a balance of €416 billion and 19,200 employees (in the group; 5,170 in the bank itself), it is the eighth-largest financial institution in Germany.
As a commercial bank, BayernLB offers private and commercial customers a universal range of services in private, industrial, investment and foreign business. This includes loans, securities trading and asset management, as well as mid-term and long-term bond issuance and securitization. The bank is refinanced through a variety of commercial debenture instruments.
As a state and municipal bank, BayernLB is responsible for comprehensive credit and financial counsel for the state of Bavaria and its municipalities and districts.
Through its subsidiaries, the bank is involved in a variety of further business areas. The Bayerische Landesbodenkreditanstalt is an organ of state housing policy, while the LBS Bayern is a public building society (Bausparkasse). Through its full ownership of the Deutsche Kreditbank, based in Berlin, BayernLB is also involved in retail banking.
In early 2008 it was revealed that BayernLB had made large losses due to investments in sub-prime mortgage securities in the United States. Although the extent of these investments has been the topic of speculation, it was revealed from the company's Q2 2008 financial report that over €24 billion had been invested in critical securities, with losses of €2.3 billion in 2007 and a further €2 billion in the first quarter of 2008.
The heavy public criticism took its first toll in March, 2008 when CEO Werner Schmidt resigned. The crisis also consumed the governing CSU party and its chairman, Erwin Huber, who as Bavarian Minister of Finance was the acting chair of the bank's Administrative Council and was accused of covering up the extent of losses.The bank and the losses were major factors in the September, 2008 parliamentary elections, in which the CSU had its worst election result since 1962 and Huber resigned.
The bank's shares slipped more than 2% after the country's central bank said it was time to roll back some of its economic support measures after recent crisis. The bank representatives advise economy was not ready for an increase in borrowing costs, and so the goal is to keep interest rates on hold. But it said it would end some of the measures it had introduced during the global downturn to increase the amount of money in the financial system. The German economy has continued to grow during the downturn. This is in stark contrast to more developed economies that fell into recession.