The year 2015 started on a positive note for JPMorgan Chase & Co. (JPM) as far as the resolution of litigation issues is concerned. After settling a lawsuit for foreign exchange market price manipulation last week, the bank is on the verge of resolving another legal headwind.
JPMorgan has agreed to settle in principle a class-action lawsuit filed over nearly $17.58 billion worth of mortgage-backed securities (“MBS”) sold by Bear Stearns Cos. The bank will pay $500 million to resolve the case. Bear Stearns was acquired by the company in 2008.
Notably, the settlement is not yet final and both parties are seeking preliminary approval from the court by Feb 2, 2015. The case was filed at the U.S. District Court in Manhattan in Sep 2008.
A group of pension funds, including the New Jersey Carpenters Health Fund and the Public Employees’ Retirement System of Mississippi, had alleged that Bear Stearns had misrepresented the facts about the underlying loans that were bundled and sold as MBS. The case accused Bear Stearns of violating federal securities laws by selling MBS that were backed by roughly 47,000 subprime ‘Alt-A’loans in 14 offerings between May 2006 to Apr 2007.
Further, ratings for these MBS were later cut to ‘junk’ status despite nearly 92% of these being once rated as ‘AAA’ by the rating agencies. Consequently, value of the securities sank and the concerned investors faced losses.
We believe that the latest attempt by JPMorgan to resolve the litigation will go in a long way in clearing its legal headwinds. In the last two years, the company has paid more than $20 billion to resolve several litigations pertaining to its business conduct prior to the financial crisis. This has significantly impacted the bank’s financial performance.
Though JPMorgan continues to confront legal issues head on, we believe that resolution of such cases will aid the company to focus on its core performance.
Currently, JPMorgan carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks include Navient Corporation (NAVI), Western Alliance Bancorporation (WAL) and Affiliated Managers Group Inc. (AMG). All these stocks sport a Zacks Rank #1 (Strong Buy).
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