1. 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.”1 Within the walls of its sparkling new office tower, Bear Stearns executives knew this derogatory and distasteful characterization aptly described the transaction. Indeed, Bear Stearns had deliberately and secretly altered its policies and neglected its controls to increase the volume of mortgage loans available for its “securitizations” made in patent disregard for the borrowers’ ability to repay those loans. After the market collapse exposed its scheme to sell defective loans to investors through these transactions, JP Morgan executives assumed control over Bear Stearns and implemented an across-the-board strategy to improperly bar EMC from honoring its contractual promises to disclose and repurchase defective loans through a series of deceptive practices. In what amounts to accounting fraud, JP Morgan’s bad-faith strategy was designed to avoid and has avoided recognition of the vast off-balance sheet exposure relating to its contractual repurchase obligations – thereby enabling JPMorgan Chase & Co. to manipulate its accounting reserves and allowing its senior executives to continue to reap tens of millions of dollars in compensation following the taxpayer-financed acquisition of Bear Stearns.
Oh, maybe they did.
At least that’s what the lawsuit claims.
It’s especially nice when you make crap loans and then short the companies you intentionally lay off the bad paper on, knowing they’ll blow up in advance. And that’s alleged too:
24. Knowing that its fraudulent and breaching conduct was resulting and would continue to result in grave harm to Ambac, Bear Stearns then implemented a trading strategy to profit from Ambac’s potential demise by “shorting” banks with large exposure to Ambac-insured securities. (The “shorts” were bets the banks’ shares or holdings would decrease in value as Ambac incurred additional harm.) In late 2007, Bear, Stearns & Co. Senior Managing Director Jeffrey Verschleiser boasted that “[a]t the end of October, while presenting to the risk committee on our business I told them that a few financial guarantors were vulnerable to potential write downs in the CDO and MBS market and we should be short a multiple of 10 of the shorts I had put on . . . In less than three weeks we made approximately $55 million on just these two trades.”31 Bolstered by this success, Bear Stearns carried this trading strategy into 2008. On February 17, 2008, a Bear Stearns trader told colleagues and Verschleiser, “I am positive fgic is done and ambac is not far behind.”32
But wait, as Billy Mayes used to say, there’s more!
JP Morgan caused EMC to reject legitimate repurchase demands by Ambac, as well as other financial guaranty insurers, to understate materially the accounting reserves JPMorgan Chase & Co. was required to accrue and disclose in its financial statements to reflect the liability inherited from EMC for repurchase obligations associated with defective loans. JP Morgan thus interfered with EMC’s contractual obligations to Ambac (and other insurers) to assist its parent corporation, JP Morgan Chase, effectuate a massive accounting fraud. JP Morgan interfered fraudulently, and deceptively represented to Ambac that the rejections of Ambac’s repurchase demands were based on the reasons set forth in the written responses to the demands. In fact, JP Morgan itself had concluded, and knew that EMC and Bear Stearns & Co. (prior to JP Morgan taking control of Bear Stearns & Co.) previously had concluded, that the bases for the repurchase demands for a substantial portion of challenged loans were well founded. Indeed, in a number of instances, EMC had made repurchase demands on the originators of the loans for the very same reason(s) Ambac cited in support of its repurchase demands to EMC.
But I thought Jamie Dimon has repeatedly told us that JP Morgan was a very ethical company, and never did anything wrong? Ambac disagrees.
27. Moreover, even while refusing to repurchase breaching loans that Ambac identified and requested, the same JP Morgan executive implemented a policy of demanding that suppliers repurchase from EMC the same loans, for the same reasons that Ambac and other financial guarantors had requested EMC to repurchase.36 JP Morgan rebuffed Ambac’s repurchase requests even where Bear Stearns had previously demanded that originators repurchase the exact same loans because the same or similar defects subsequently identified by Ambac.37 The duplicitous and deceptive conduct is patent and the motivation clear: JP Morgan adopted a strategy to deliberately and systematically deny the financial guarantors’ legitimate repurchase demands to avoid JPMorgan Chase & Co. from bringing onto its financial statements the massive off-balance sheet exposure and, in doing so, effectively engaged in accounting fraud.
You know all those off-balance sheet games that I have been screaming about for four years now? The same sort of games that took Enron down the toilet, and which you can find in virtually every major financial institution in The United States in one form or another?
We still allow this to be done in the United States….. why?
After conducting the initial review noted above, Ambac reviewed a random sample of 1,482 loans, with an aggregate principal balance of approximately $88.2 million, selected across all four Transactions. The results of that review are remarkable. Of these 1,482 loans, 1,351, or over 91%, breached one or more of the representations and warranties that EMC had made to Ambac.
91% of the Chocolates in the box are really used dog food, but nobody has gone to jail for selling adulterated boxes of Chocolate.
Full complaint below, and again: Where are the damned handcuffs?
Can someone explain how this is not a banking-industry-wide organized criminal conspiracy and why there are not thousands of criminal felony indictments standing right here and now from the top executive offices of these firms on down?
Full complaint below.