September 30, 2011 9:42 pm

BofA and JPMorgan sued over securities

Bank of America and JPMorgan Chase were sued for selling $4bn of mortgage-backed securities to German lenders that later turned sour.

Sealink Funding, an entity set up by Landesbank Sachsen, a German bank, claimed in suits filed in New York that the US banks sold residential mortgage-backed securities that they knew were backed by bad mortgages.

“Defendants not only concealed from Sealink the truth about the poor quality of the securitised loans, defendants also knowingly provided false information to the credit rating agencies in order to secure a triple A blessing for its RMBS,” the complaint against JPMorgan read. The BofA complaint used similar language. JPMorgan declined to comment.

BofA said: “This appears to be another sophisticated investor looking for someone to blame for investment losses suffered due to a downturn in the economy. We will vigorously defend this lawsuit.”

The financial crisis in 2008 was stoked by subprime mortgages packaged into securities and sold to international investors. German banks were avid buyers of the securities, many of which lost most of their value when homeowners began to default en masse on their mortgages.

US banks, particularly BofA, are mired in mortgage litigation, with diverse claimants demanding compensation for billions of dollars of losses. Countrywide Financial, the mortgage business acquired by BofA in the crisis, is a focus for attention, given its large role in subprime lending.

In the complaint against BofA, Sealink said it had been victim of a “massive fraud perpetrated by ... Countrywide Financial”, which made “representations ... [that] were recklessly or knowingly false when made, and caused Sealink to believe that the defendants’ RMBS it purchased were safe investments”.

Warren Buffett, whose Berkshire Hathaway conglomerate invested $5bn in BofA, told Bloomberg Television on Friday that he backed Brian Moynihan, the company’s chief executive, to pull the bank out of the morass of mortgage issues.

“The bank has a wonderful underlying business – it’s got lots of problems,” he said. “The bet is, is Brian going to get rid of those problems? It won’t take six months or a year; it will take much longer than that even. But the underlying business is doing fine.”

Landesbank Baden-Württemberg, the German lender, which inherited distressed assets from Sachsen, said it, too, had sued JPMorgan. “LBBW bases its cause of action primarily on the accusation of misleading statements and breach of duty with regards to the structuring and sale of these securities,” it said in a statement. LBBW declined to comment further.

Earlier this week, LBBW had a suit against Goldman Sachs dismissed. The suit alleged Goldman had committed fraud and misrepresentation when it sold a collateralised debt obligation to the German bank that was backed by mortgage-backed securities. A judge said the allegations were “sparse and lack particulars”.

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