Jamie Dimon’s $13 Billion Secret | The Nation


Jamie Dimon’s $13 Billion Secret

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As summer turned into fall, the political heat on Schneiderman kept ratcheting up. Miller decided that the best person to calm Schneiderman down was former New York Attorney General Eliot Spitzer. After speaking with Schneiderman, however, Spitzer concluded that he was on to something and should hang tough. “That was a remarkable moment,” Schneiderman says.

In an interview, Spitzer acknowledged that he spoke with Schneiderman at Miller’s request but declined to elaborate. Miller says he asked Spitzer to see if he could “bridge” the differences between the two men. “That obviously didn’t work,” he adds.

As angry as government officials were at Schneiderman’s renegade behavior, they also knew that they needed him inside the tent to get a deal done. In early November 2011, Schneiderman received an unexpected call from Donovan, who proposed that they work together on a joint investigation into the pre-crash conduct of the banks. The two spent some time working out the details, particularly in terms of delaying the announcement of the National Mortgage Settlement until the full-scale probe was announced. Schneiderman was on board.

The next thing Schneiderman knew, he’d been appointed co-chair of the residential-mortgage-backed securities “working group” of President Obama’s Financial Fraud Enforcement Task Force. Then he was asked to be Michelle Obama’s guest at the 2012 State of the Union address, when Obama announced that he had asked Holder to begin a new investigation into pre-crash activities on Wall Street. “I did not come down to Washington just because of my charm,” Schneiderman says.

Once it became clear that no general release would be part of the National Mortgage Settlement and that the banks could face prosecution for their pre-crisis underwriting of mortgage-backed securities, H. Rodgin Cohen, a senior partner at Sullivan & Cromwell, went to see Schneiderman. Obviously, not just any lawyer gets a private audience with the New York attorney general. But the elfin Cohen is considered one of the deans of the Wall Street bar. “He was just a guy coming in to chat with me about the situation,” Schneiderman says, smiling. They agreed that since there was likely to be additional litigation, there could also be “a peace premium” paid by the banks to settle claims with the federal and state authorities. “We connected immediately,” Schneiderman recalls. “He was on the other side, but we saw things the same way.” In short order, the relationship would prove very useful to both men.


By March 2012, Tony West, a Harvard graduate, former assistant US Attorney in California and partner at the law firm Morrison Foerster, had replaced Thomas Perrelli at the Justice Department, and the hard work of the new task force began in earnest. Schneiderman quickly grew dissatisfied. The effort seemed amorphous and like a “Potemkin village” to him. The most important thing, he kept hearing from the Justice Department, was to lower expectations.

Schneiderman blew up again. “I was not about to let that happen to this working group,” he says. He wanted the group to have its own office space and a dedicated staff of investigators, and he wanted it to go for the jugular. Finally, Steve Linick, the inspector general of the Federal Housing Finance Agency (FHFA)—the agency that oversees the conservatorship of Fannie Mae and Freddie Mac—offered the working group some office space. “We raised a big ruckus,” Schneiderman says. “I think the White House eventually called up West and said, ‘You’ve got to do something,’ and then they hired a bunch of contractors and they started assigning assistant attorneys general in different US Attorneys’ offices around the country to actually do some work.” (West confirms that the White House contacted him to figure out what had Schneiderman so peeved.)

Subpoenas went out in February and March, and the investigations commenced. But winnable cases do not emerge overnight. “We have to prove intent, so sometimes we actually have to cross T’s and dot I’s a little bit more assiduously than might otherwise be the case,” a Justice Department official says. “Before we bring a case, we want to make sure that it’s a case we can actually go to court and win.” Schneiderman and his team were eager to have cases brought after supporting the National Mortgage Settlement. “They felt very exposed during this period and wanted to have something to show for the fact that they had made this deal,” says one person involved in the negotiations.

In October 2012, after a separate, independent investigation that lasted more than a year, Schneiderman sued JPMorgan in state court, claiming that Bear Stearns and its mortgage-origination subsidiary, despite legal representations to the contrary, had failed to properly evaluate the quality of mortgages that the firm was securitizing and selling to investors. In the complaint, Schneiderman argued that Bear Stearns—by then owned by JPMorgan Chase—had “systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans. Furthermore, even when [d]efendants were made aware of these problems, they failed to reform their practices or to disclose material information to investors.” As a result, the loans “included many that had been made to borrowers who were unable to repay, were highly likely to default, and did in fact default in large numbers.”

Schneiderman’s complaint was detailed and convincing, and it included the requisite outrageous e-mails. Bear Stearns bankers had referred to one securitization—known technically as SACO 2006-8—as “SACK OF SHIT” and “a shit breather.” Bear Stearns sold the debt deal anyway to investors all over the globe. To Schneiderman’s surprise, Dimon called him on the day he filed the complaint. It was unfair to blame JPMorgan for the wrongdoing that occurred at Bear Stearns, he argued. Schneiderman cut him off. “Look, just talk to your lawyers,” he said.

That same month, US Attorney Wagner and his team in Sacramento started issuing subpoenas to JPMorgan about what the bank had done in the years leading up the 2008 financial crisis. They reviewed hundreds of thousands of internal documents, took the sworn depositions of about a dozen JPMorgan bankers, interviewed dozens who had worked with the bank’s mortgage-backed securities, and spoke with the mortgage originators who had sold mortgages to JPMorgan. Wagner says he found “a pretty strong pattern” showing that “the very due-diligence process that was supposed to be identifying bad loans and weeding them out was essentially being subverted or circumvented in the rush to get these to market.” Momentum seemed to be building.

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