Written by Biloxi
Another shoe has dropped for JP Morgan Chase. Bear Stearns who is now owned by Chase, has become a black eye for Chase. This latest bombshell shows that banks have been up to their eyeballs in bad bank practices. And now banks like JP Morgan Chase that purchased the bankrupt and subprime mortgage banks during the 2008 economy has beome an albatross on their backs.
Bloomberg’s Jody Shenn reports an ongoing lawsuit Ambac, a bond insurer, and former Bear Stearns mortgage unit EMC, now part of JP Morgan Chase. In the lawsuit, Ambac alleges far more serious behavior by Bear Stearns. Ambac accused former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial of defrauding investors through the mortgage securities they created and sold while at Bear Stearns. How did Bear Stearns defraud investors? From Exhibit 1 to the Ambac lawsuit, “In mid-2006, Bear Stearns induced investors to purchase, and Ambac as a financial guarantor to insure, securities that were backed by a pool of mortgage loans that – in the words of the Bear Stearns deal manager – was a “SACK OF SHIT.”
What is interesting is that news of former Bear Stearns mortgage unit EMC surfaced from internal whistleblowers in the The Atlantic last year. The Atlantic reported that EMC mortgage had been falsifying loan performance data provided to credit rating agencies who gave them sweetheart billion dollar deals. The Atlantic wrote:
Employed during the go-go years of 2004-2006, and speaking in an interview taped by BlueChip Films for a documentary in final production called Confidence Game, Van Leeuwen sheds some light onto the shenanigans going on during the mortgage boom that might surprise even [then NY Attorney General Andrew] Cuomo. As a former mortgage analyst at Dallas-based EMC mortgage, which was wholly owned by Bear Stearns, he had first-hand experience working with Bear's mortgage-backed securitization factory. EMC was the "third-party" firm Bear was using to vet the quality of loans that would purchase from banks like Countrywide and Wells Fargo.
Van Leeuwen says Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have to carry the cost of holding these loans on their books.
According to two EMC analysts, they were encouraged to just make up data like FICO scores if the lenders they purchased loans in bulk from wouldn't get back to them promptly. Every mortgage security Bear Stearns sold emanated out of EMC. The EMC analysts had the nitty-gritty loan-level data and knew better than anyone that the quality of loans began falling off a cliff in 2006. But as the cracks in lending standards were coming more evident the Bear traders in New York were pushing them to just get the data ready for the raters by any means necessary.
In another case, as more exotic loans were being created by lenders, the EMC analyst didn't even know how to classify the documentation associated with the loan. This was a data point really important to the bonds ratings. When Bear would buy individual loans from lenders the EMC analyst said they couldn't tell if it should be labeled a no-doc or full doc loan. Van Leeuwen explains, "I wasn't allowed to make the decision for how to classify the documentation level of the loans. We'd call analysts in Bear's New York office to get guidance." Time was of the essence here. "So, a snap decision would be made up there (in NY) to code a documentation type without in-depth research of the lender's documentation standards," says Van Leeuwen.
Two EMC analysts said instead of spending time to go back to the lender and demand clarification, like if verification of income actually backed these loans, the executives at Bear would just make the loan type fit. Why? One EMC analyst explains, "from Bear's perspective, we didn't want to overpay for the loans, but we don't want to waste the resources on deep investigation: that's not how the company makes money. That's not our competitive advantage -- it eats into profits."
Then NY Attorney General Andrew Cuomo was pursuing a criminal investigation against the banks that may have supplied bad information to the credit rating agencies about the quality of mortgages that they signed off on.
In addition, Bear Stearns' misdeeds go a lot more deeper into the former Bear Stearns mortgage executives' bad practices:
They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally’s mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books.
Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm’s due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is now an executive in Goldman Sachs’ mortgage division.
If this scandal is proven to be true that Bear Stearns implemented a trading strategy to profit from Ambac demise by “shorting” banks with large exposure to Ambac-insured securities then this will be a head blown possible criminal charges against the banks and the former executives for the company and others who were part of the fraud and benefitted from it. According to The Atlantic's sources on Tuesday, "the Denver office of the SEC is now looking into the individuals involved in these charges."
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