The investment management division of JP Morgan (JPM) has agreed to settle with two bond insurers over allegations it filled client investment accounts with toxic mortgage bonds as the market was turning south, just ahead of the financial crisis.
The U.K. subsidiaries of Ambac Assurance (AAC) and Assured Guaranty (AGO) began seeking $2 billion of damages in a New York court as early as 2008 and over the weekend agreed to settle with JPM for around $400 million, announcement on Wednesday said.
The bond insurers sued on behalf of themselves and two other U.K. clients, both specialized vehicles established as part of a Scottish Re life insurance securitization carried out in 2005.
They alleged gross negligence and breaches of contract and fiduciary duty on the part of JP Morgan.
JP Morgan invested Scottish Re funds in non-agency mortgage-backed securities and, according to the plaintiffs, ignored its investment mandate by continuing to buy mortgage bonds even as warning signs of a market deterioration began to multiply.
As the financial crisis took hold, the collateral underlying the securitization notes was insufficient to cover the liabilities of the insurance contracts in question.
Scottish Re and its associated securitization vehicles were hit by multiple downgrades from ratings agencies, and were left nursing heavy losses as a result.
The settlement is just one of many legacy conduct issues that have left JP Morgan facing litigation.
While the Ambac suit was the result of conduct JP Morgan's investment management division, when it comes to mortgage-backed securities, the bulk of the litigation against the bank relates to the pre-crisis conduct of Bear Stearns. JP Morgan acquired Bear in May 2008 as part of a government brokered rescue deal.