SEC In Talks With JP Morgan To Settle CDO Probe

The Securities and Exchange Commission (SEC) and JP Morgan Chase & Company are in advanced discussions in an attempt to resolve a probe into its dealings with hedge fund Magnetar over the creation of collateralized debt obligations (CDO), according to an Investment News article.

JP Morgan has thus far successfully avoided being dragged into the mortgage controversies that have hounded Goldman Sachs, Bank of America and Wells Fargo since the collapse of the housing bubble in 2007. Unfortunately, the latest round of subpoenas to JP Morgan could indicate that the SEC is expanding its probe into other lenders’ over collateralized debt obligations (CDO) and mortgage backed securities (MBS).

CDO and MBS were very prevalent during the 2008 financial meltdown, when Wall Street firms bundled and repackaged subprime home mortgages into bonds and other securities that were marketed and sold to investors with the blessings of the credit rating agencies. Investors lost massive amounts of money in these products as the housing market collapsed and the securities plummeted in value. Recently, the House of Representatives Subcommittee on Investigations issued a report accusing Goldman Sachs of misleading clients and manipulating markets. Other reports have accused traders and executives of knowingly packaging subprime loans into bonds and other complex securities, sometimes even betting against them while marketing and recommending them to their own customers. JP Morgan has estimated its maximum possible losses from these proceedings to be $4.5 billion as of March 31, 2011, unchanged from its estimate of December 31, 2010.

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