I was on Max Keiser’s show yesterday talking about JP Morgan’s triple-digit billion mortgage repurchase litigation problem that they refuse to accurately reflect on their financial statements. A problem that is now compounded by the fact their regulator, the SEC, has told them they want to sue Jamie Dimon’s bank for securities violations or bring an enforcement action against them, which could validate some of the RMBS fraud claims in the eyes of New York judges overseeing the $120 billion in litigation. What I didn’t realize was how much of a blatant accounting cover up this mortgage repurchase issue is –one that some analysts think could led to a massive accounting fraud suit against JP Morgan and their auditor PricewatershouseCoopers.
In a May 18th newsletter by Robert Christensen a senior advisor to Chicago-based financial forensics Natoma Partners he writes, “What I have found is that the reserves required for repurchase of loans that did not meet the reps & warranties have been consistently and massively underestimated.”
Christensen, a former head of audit for financial service companies at Authur Andersen, boldly points out, “These provisions have actually increased from the previous two quarters (for the major banks $C, $WFC, $BAC, $JPM he covers) for all the banks except for JP Morgan Chase.”
I had the chance to interview Christenson yesterday who helped me understand it’s not just the fact that the bank’s mortgage putback reserves are low (and thus they don’t have to set aside more capital) it’s the fact that accounting procedure called for the banks to actually set up putback reserves during the mortgage go-go years of 2005-2008. NOT after their customers got lawyers involved demanding they honor the security warranties and buy back these totally toxic garbage never-paid-their-mortgage loans. So while we are seeing banks lobe on billions of putback reserves this is really a game of catch up that the auditors watchdog (PCAOB) and the SEC could currently be investigating the banks and their auditors for not accounting for the problem right in the first place. You can see a hint of this in a correspondence letter filed by the SEC between them, BofA and their auditor asking questions about mortgage repurchase accounting and if their methods are in error. The banks response to the SEC is unfortunately redacted so we can’t see it but I have to question why they’d redact it if it was a bad news answer. If the SEC is asking BofA these questions I’d be interested in seeing if JP Morgan got similar questions.
JP Morgan’s auditor PwC does this whole other ‘creative accounting’ move to make it difficult for the SEC or their investors see what kind of real private label mortgage repurchase liability they think they have. They simply moved the whole category into litigation reserves. A lovely little accounting bucket Francine McKenna of retheauditors.com told us last week doesn’t have to be broken out. Now what’s interesting is Christensen told me of the four banks he covers JP Morgan is the only one who does this! Yep somehow PwC, who also audits Bank of America, has allowed JPM to sweep their massive private label rmbs putback risk under the table so main street investors can’t even see how many billions the bank thinks it will have to pay rmbs investors they allegedly stole billions from. It’s interesting to note that BofA has it’s own set of billion dollar RMBS fraud and putback lawsuits but PwC doesn’t follow the same kind of ‘creative accounting’ with their repurchase liability risk?
The only putback detail we get to see from JP Morgan, starting on page 38 of their Q1 10-Q, is all the GSE putbacks they had to pay back. They do mention the average loss severity on the resi mortgage loans in the securities is a whopping 58% but then that’s a self-determined number. And given the way their $2bn erroneous derivative trading loss keeps growing (reports now say it could be a $6bn trading loss) I don’t see how we can trust a lot of JP Morgan’s estimates these days.
McKenna who’s been warning about the banks underestimated putback reserves since 2007 told me, “We are seeing PCAOB citing auditors for not pushing back on banks on mortgage loan loss reserves and litigation contingencies. But their inspection reports are not timely and do not name the bank they are finding auditing faults with. So it’s worthless to outsiders or general investors.”
Now for JP Morgan to stop using this creative accounting to mask their mega billion rmbs putback problem the PCOB and the SEC would have to lay down an iron hand and publish some kind of public infraction or fine against PwC and JP Morgan. And if that happened well…I’d expect a bucket of class action stockholder lawsuits to pop up against JP Morgan and PwC. You know kind of like those Enron or the Telecom suits that labeled the auditors accomplices in financial crimes.