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J.P. Morgan sued for defrauding investors

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02/10/2012
The New York Attorney General has sued J.P.Morgan Chase for allegedly defrauding investors who lost billions of dollars on mortgage-backed securities sold by Bear Stearns.

In the first legal action to come from a long-running working group set up by US President Barack Obama to investigate the 2008 financial crisis, the Attorney General is pursuing J.P.Morgan for damages on behalf of investors who lost more than $20bn.

While it did not sell the securities itself, J.P.Morgan is on the hook having bought investment bank Bear Stearns in March 2008.

According to reports, J.P.Morgan said it will contest the allegations.

Mortgage-backed securities were at the heart of the financial crisis which has rocked the globe.

Based on a pool of underlying mortgages – many of which were lowly rated by agencies – investment banks nonetheless managed to package up and sell the securities to investors.

By packaging up good and bad debt together, higher credit ratings were obtained from ratings agencies, meaning investors were unaware of the risks they were exposing themselves too.

When homeowners who could not afford a mortgage in the first place defaulted, the loans started to slide in value, with many of them becoming worthless.

The civil suit, filed by New York Attorney General (NYAG) Eric Schneiderman, accuses Bear Stearns of failing to ensure the quality of loans underlying residential mortgage-backed securities.

It claims the bank “systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans”.

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