New York Attorney General Eric Schneiderman speaks during a news conference at the Justice Department in Washington, Tuesday, Oct. 2, 2012, in Washington. The federal government on Tuesday threw its support behind a lawsuit against JPMorgan Chase accusing Bear Stearns, the investment bank JPMorgan bought in 2008, of engaging in massive fraud in deals involving billions in residential mortgage-backed securities. (AP Photo/Carolyn Kaster)
The Residential Mortgage-Backed Securities working group—a joint federal-state task force announced by President Obama at this year’s State of the Union address—filed its first case yesterday, targeting big-six bank JPMorgan Chase for widespread fraud leading up to the financial collapse of 2008.
The civil case, filed in New York State Supreme Court by New York Attorney General Eric Schneiderman, a co-chair of the RMBS task force, targets the practices of the former Bear Stearns, which was acquired by JPMorgan Chase in 2008.
Bear Stearns, according to the suit—and several similar suits and shareholder actions over the years—was consistently practicing the type of fraud at the center of the Wall Street collapse four years ago: bundling up shaky (at best) mortgages into securitization products, and then selling these products to investors while deceiving them about the due diligence done to ensure the health of the underlying mortgages. (You can read the entire thirty-one-page filing here.)
Between 2005 and 2007, the suit describes how Bear Stearns was hooked up to a firehouse of mortgages that it must have known weren’t being thoroughly evaluated before being packaged them into MBS’s (mortgage-backed securities). One Bear Stearns employee cited in the filing said he evaluated 1,594 loans in a five-day period—a truly impossible task, and one that people at Bear must have known wasn’t adequate. The suit also describes how the bank had an internal quality-control unit that it knew was in “crisis,” but neglected to change any protocols.
Of course, all the while Bear Stearns was telling investors that it carefully investigated all of the loans, and assured them the MBS’s were top-notch investment products. When it did send them for a (limited) review by Clayton Holdings, a third-party evaluator of mortgages, it ignored the warnings furnished by Clayton. (E-mails and other documents from Clayton Holdings to officials at Bear are included in the filing).
This is a fairly amazing chain of fraud being alleged—but that’s not it. The suit also describes how Bear Stearns executives were indulged in a shameful double-dipping scheme.
When loans inevitably started to go bad, some within a month, the bank was required to take them out of the securitization products and seek restitution from the mortgage originators. Bear Stearns executives would go to the originators and sell them back the bad loans for a fraction of the original cost, according to the suit, and then leave the mortgages in the MBS’s—all while pocketing the money they got from the originators.
(Think of this like an auto dealer putting a faulty part in your car, and upon discovering the parts didn’t work, going back to the manufacturer for a discount—but keeping that money and then failing to even fix your vehicle.)