On Wednesday, Allstate Corp. (ALL) filed a federal complaint against the second largest investment banker, JPMorgan Chase & Co. (JPM), alleging that the latter sold more than $757 million of toxic investments in lieu of safe investments to Allstate between 2004 and 2007, which later experienced a drastic price decline.
Accordingly, Allstate now directly demands justice and a penalty to recoup its losses from the leading US bank. Allstate also seeks compensation for the litigation as it incurred huge losses on account of false information provided by JPM on the investment quality of the securities.
Allstate accuses the leading US bank of being aware of the combination of toxic mortgage securities offered to them and that the investments would default in near future. The investments, including Bear Stearns Cos and Washington Mutual Inc, were offered to Allstate with high grade “AAA” ratings but more than 97% of these are now rated as junk. These companies were bought by JPM four months after the economic downturn in May 2008.
Allstate believes that JPM was already conscious about these companies being extensively exposed to subprime and other risky mortgage-backed securities (MBS). Further, Allstate claims to be duped by JPM as the latter acknowledged the worth of these investments, thereby concealing and misrepresenting crucial information.
Conversely, Allstate is not the only organization to point out the misleading investment practices of JPM. The leading US bank has been handling multiples of cases like these since the markets crashed in 2008 and billions of its investments went toxic. Last month, JPM had also reportedly allocated about $1.5 billion from its reserves, primarily to deal with such MBS litigations.
On the other hand, JPM is not the only banker whom Allstate has charged for investment fraud. In December 2010, Allstate had also charged Countrywide Financial, which was acquired by Bank of America Corp. (BAC) (BofA) in July 2008, and 17 other defendants, alleging that the defendants have sold $700 million of toxic investments between March 2005 and June 2007.
These charges pointed out the misleading investment practices of Country Financial, which were carried without revealing the actual worth of the MBS. BofA incurred about $1.7 billion in investment losses in 2008.
Although the lawsuits remain unsettled and are expected to take a long time, we believe such mortgage pullback issues need to be attended extensively in order to avoid another downturn in the market cycle.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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