JP Morgan says that it is in “advanced” negotiations to settle its part of a broad U.S. Securities and Exchange Commission investigation into how mortgage-linked securities were packaged and sold as the housing market unraveled, according to a Bloomberg article by Joshua Gallu and David Scheer entitled “JPMorgan Is in ‘Advanced’ Negotiations to Resolve CDO Probe.”
JPMorgan, the second largest U.S. bank and the only Wall Street bank to remain profitable throughout the financial crisis, is being investigated by the SEC for its role in designing and selling a $1.1 billion collateralized debt obligation known as “Squared” in 2007, according to the article.
The SEC is reportedly examining JPMorgan’s failure to disclose to investors the role of its hedge-fund client, Magnetar Capital LLC, in selecting underlying assets in the apparently “built to fail” Squared CDO, which Magnetar allegedly bet against. The SEC has served Wells Notices on Michael Llodra, former JPMorgan global head of structured product collateralized debt obligations, and Edward Steffelin, a former executive at a firm that helped manage Squared, according to the article.
Separately, JPMorgan was also subpoenaed by the SEC as part of an investigation into whether underwriters of mortgage-backed securities, such as Credit Suisse, improperly failed to repurchase bad loans from buyers of the MBS according to the article.
The SEC is also investigating mortgage originators such as Countrywide Financial Corp. and underwriters including Wells Fargo, which reportedly agreed to pay $11 million to settle SEC charges that it sold risky CDOs at unfair prices.
The CDO investigation was punctuated last year when Goldman Sachs agreed to pay a record $550 million and admitted to making a “mistake” in its disclosures about a subprime-linked CDO. The probe has also included Citigroup Inc., Deutsche Bank AG, UBS AG, and Morgan Stanley, according to the article.
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