Reuters is Writing Stories to Help JP Morgan Defend Itself from the NYAG Now

J.P. Morgan’s outside counsel at Sullivan & Cromwell are showing signs of desperation in their mortgage securities fraud lawsuits. You know the ones that the bank says in SEC fillings are now $140 billion of litigation. Last week the banks lawyers got a Reuters reporter to write a hit piece on the New York Attorney General’s $22 billion civil fraud suit against JPM / Bear Stearns.

The Reuters story, by Karen Freifeld, basically speculated a judge would be looking at a conflict of interest in the AG’s office because they hired a top lawyer from the firm, PBWT, who first discovered some of the alleged Bear Stearns rmbs fraud. Freifeld starts by writing a line that ‘legal experts’ think the former PBWT attorney who worked on the Ambac v. JP Morgan Securities suit has a conflict because she also played a role in the NY AG’s suit. Karla Sanchez, the lawyer in question, started with the NY AG in January 2011 – after the explosive amended Ambac complaint was filed. This is the complaint you just saw me talking about in the Frontline film The Untouchables.

It’s odd for Retuers to not quote actual working lawyers in the story and leave the reader guessing that the reporter actually found attorneys to back up her claim. I called five securities lawyers last week trying to get one of them to go on the record that they saw a conflict here but none would. That’s because Robert Sacks, JPM’s puffy chested outside counsel from Sullivan & Cromwell, doesn’t actually lay out in the motion what he thinks the conflict is.

The Reuters reporter, who has indirectly become a JP Morgan’s flack, also doesn’t explain to the reader that JP Morgan’s lawyer, Sacks, didn’t actually file a motion in the NY AG’s case in New York civil supreme court. All he really did is indirectly mention the idea in a damn footnote in a motion for an entirely different case. On February 19th Sacks filed a motion trying to stop Judge Ramos from allowing AMBAC/PBWT to get loan file discovery and CLAS database records from third-party due diligence firm Clayton – info they been asking for over a year that Clayton is also fighting to not turn over because it’s likely really really damaging. [ You see on top of all this Clayton is apparently STILL covering up for it's big bank clients even though they signed an agreement to help the State of New York prosecute their financial crisis cases in turn for them not getting sued for their role in billions of rmbs fraud. ] It’s this motion that has the footnote that Reuters in turn made into a story to discredit the NY AG’s head of economic cases.

Here is what the footnote says:

Defendants understand that, upon joining the NYAG, this former PBWT partner was
initially screened from participating in the NYAG’s investigation relating to Bear Stearns, but
that the screen was later lifted and she participated in the investigation. Following concerns
raised by defendants, the NYAG apparently reimposed the screen. Defendants have asked the
NYAG to confirm whether there is additional information about this lawyer’s involvement in the
matters leading up to the NYAG’s suit against Bear Stearns that they should be aware of before
deciding what further action is warranted.

Somehow that footnote made the Reuters reporter think this:

The case against JPMorgan is similar to one that the lawyer had worked on before joining the Attorney General’s office, JPMorgan said in court papers this week, raising the possibility of a conflict of interest.

I did some background checking on what the lawyer in question here, Karla Sanchez, did at PBWT. She ran all of discovery in the monoline suits so yea she would know where the bodies are buried. But she didn’t leave PBWT and go work for a firm to use that info to harm her prior client Ambac. That’s where a real conflict would be. Instead people inside the AG’s office explain she simply led an administrative role in overseeing his case – for a little while – that is a copy cat of the Ambac case. But then so is nearly every rmbs putback case against JP Morgan/Bear Stearns filed in the last two years by clients of Bear’s mortage trading team. The real bulldog lawyer the AG put on the case actually came from the DOJ and joined last summer. I was told by someone familare with the case she was frustrated with the lack of action against the banks at the DOJ and jumped to work for the NY AG because he was actually going to try and hold them accountable. Her name is Virginia Romano and she’s actually known to get things done and not roll over.

Reuters went out and spent a few $ to even FOIA the AG’s records to show when Karla did or didn’t have her hands on the case. This is where the NY AG did something kind of stupid. They originally wouldn’t let her touch the case out of extra caution that JP Morgan would complain. Then they figured it was ok for her to play an admin role in the case – it’s not like she brought over whistleblower emails from the Ambac litigation – the AG actually had to subpoena PBWT for that kind of stuff in May 2011. And by the time she joined his office most of what Ambac had was public anyway because their suit had finally been unsealed and I broke news about it at The Atlantic. JP Morgan did end up complaining about her working the case so the NY AG took her off it. The NY AG should have stuck to their guns and just left Karla on the case. This all happen last year. Which is why it’s odd that Attorney Sacks is brining it up now in a footnote in a lawsuit that isn’t the NYAG’s case. And keep in mind NO motions have been filed in the AG’s suit against JP Morgan talking about a conflict of interest that Reuters somehow thinks could affect his case.

Now using footnotes in a legal motion to say something nasty that the press can then turn use as quotes for a story is an old trick – even PBWT has done it in their litigation against JP Morgan. Heck I’ve found some of great details in my series of reporting on this fraud in footnotes. But the reporter then has the responsibility to check out if actually true. Big Law lawyers like JP Morgan has hired often do dirty block and tackle moves for their clients and this one simply reads like they are trying to distract Judge Ramos from the real issues at hand and just be an all out dick trying to smear one of the NY AG’s top lawyer.

There was actually some real news on this case last week. JP Morgan had asked the court to assign the case to Judge Ramos – who is also trying the Ambac case. Ramos is an old judge who has said in court testimony he doesn’t like Ambac’s fraud claim although he hasn’t ruled it out. A few days after Sacks filed the motion that is the subject of this story Ramos was removed from the case. Yep on Thursday Judge Marcy Friedman became the new judge on the NY AG’s case. So all the ranting Sacks has been making to Ramos in the Ambac case about the AG’s case is kind of moot now as he’s got a new judge to brow beat into believing that the JPM (via Bear) didn’t really steal billions from their own rmbs clients.

Editors Note: AMBAC and JP Morgan have a conference meeting with Judge Ramos on Monday (2-25) at 4p.m. If the Reuters reporter is looking for some real news on these cases that’s a good place to start. I emailed Robert Sacks at Sullivan & Cromwell to ask how long he’d been working with the Retuers reporter to get that story published but he didn’t answer the email.

Here is motion Sacks filed that started this whole story:
JPM Brief 75

Lanny Breuer: Frontline’s The Untouchables Gets a Remake

Lanny Breuer told the world he’s removing himself from the office of the DOJ criminal division this week. Only a week after an explosive Frontline film, The Untouchables, made him look like kind of silly on camera for his explanation of why no Wall Street Bankers have been charged criminally. To honor Breuer a reader and great blogger I know, Jaime Falcon, has made this remake of Breuer’s interview with filmmaker Martin Smith.

It’s a must click and be prepared to laugh out loud in public like I did – at least five times.
Jaime calls it the – Liar Liar version. I think it has to be nominated for an Emmy.

Lanny Breuer Frontline Interview – Liar Liar Version

ps. The journalist Martin is asking Breuer about is referring to me and Nick Verbitsky.

NY AG Schneiderman Tells Frontline A Few Things that Just don’t Add Up

NY Attorney General, Eric Schneiderman, sat down in a rare interview with Martin Smith for his Frontline film The Untouchables. A lot of that interview didn’t make into the PBS documentary film so the transcript of his entire interview has been released. The NY AG pumps up Obama’s mortgage task force as a vehicle that really helped him bring his civil fraud suit against JP Morgan for the sins of Bear Stearns RMBS trading group. I don’t think that’s what happen — in fact I know it’s not.

As the only journalist who published the first Bear Stearns/EMC on the record whistleblower in May 2010 for The Atlantic I was able to get a unique behind the scenes look at how every regulator and private litigator was or was not involved in figuring out how Tom Marano, Jeff Verschleiser and Mike Nierenberg orchestrated the double-dipping putback scheme the NY AG sued over. At some point they all called me. This is one of the reason’s Martin Smith approached me in July to help him learn about who the players in the fraud were and how the suit was built while he was choosing which Wall Street fraud stories would make it into his Frontline film. He told me the Bear Stearns double dipping scheme looked like the case with the most evidence that has escaped criminal prosecution and I agreed. He was equally interested in the battle it took just to get the series of stories I reported on the actions of Bear Stearns and JP Morgan and their lawyers published.

Martin did a great job getting tough and focused questions in front of the NY AG. It’s an accomplishment he even got him to sit down for an interview and talk about an ongoing case. It’s also too bad more of the interview didn’t make it into the film so I think it’s really important to talk about what the NY AG said or didn’t say.

First off the NY AG did not figure out the Bear double dipping scheme that is part of his civil fraud suit against JP Morgan. When I reported the story at The Atlantic in January 2011 the scheme had already been laid out in sealed court documents by the lawyers at Paterson Belknap in mid 2010. The law firm, known as PBWT, represented three monoline clients with initial losses of just over one billion. These details were discovered before the NY AG EVER took office.

Martin Smith tries to ask Schneiderman about this here:

MS: Were you drawn for any particular reason to the monoline (PBWT’s Work) cases? Did they offer an opportunity to get at the documentation inside or the due diligence work that had gone on?

NY AG: Well, some. We started our own investigation in the spring of 2011, and we’ve reviewed millions of pages of documents and interviewed dozens of witnesses and taken depositions. So it was really a supplement to that.

But we looked at those cases and we looked at other cases. We subpoenaed records, and there’s a big, fat spreadsheet of cases that have been brought by various players out there against these institutions. But you have to keep in mind, individual firms or investors can only sue for their damages. They can sue for the particular deals they worked on, or they bought shares in.

And what we’ve put together is a platform case, which is really much broader. It’s about the systemic pattern of conduct, because, as we allege in our complaints, no investor during this period of time would have purchased any mortgage-backed securities if they had realized that the due diligence process was a sham, that the quality control process was a sham, and that the representations about underwriters meeting standards and originators meeting standards was really not being followed through.

To me supplement means the NY AG would have come up with some new evidence in his suit or charged the Bear executives individually. He didn’t do that. His suit has paragraphs literally copied out of the Ambac v. JPM/ Bear suit that PBWT did the leg work on. His suit even got the name of the audit firm wrong who told Bear’s senior executives that the practice of the RMBS traders keeping dollars from mortgage putbacks and not passing them back to the security was ‘not industry practice’ (nice way of saying it’s wrong).Francine McKenna who writes for Forbes and American Banker figured this out and questioned the NY AG’s office about it who had to admit they made a mistake in the suit. Mistakes like that are made when you copy other lawyers work. Instead the only thing new the AG came up with was a fancy legal term ‘ the PLATFORM case’ to describe his lawsuit filed off of the private sectors work.

He sued for over $20bn in rmbs issued by the bank which is more than the monoline suits sued for but if he settles and gets less than a billion from JP Morgan then he’s fined them less than the actual damages of the total monoline suits. I guess that’s what the NY AG means by supplement?

The NY AG – unlike the DOJ who did not contact any of the Bear whistleblowers during my three years of reporting of the fraud – did at least interview whistleblowers used in my reporting. He also made the effort to contact Nick Verbitsky, doc film maker who had EMC whistleblowers on camera for his film, and ask for all his unedited tape – which I reported for DealFlow Media in mid 2011. Basically he just did a Fact Check for his role in his JP Morgan/Bear suit and clearly found that the work of reporters and lawyers at PBWT was enough to bring a fraud suit. Except he falls down on his sword and sues civilly without charging any individuals or charging a bank with criminal wrong doing.

PBWT’s suit named-names like Tom Marano, Mike Nierenberg, Jeff Verschleiser – that’s because internal Bear emails and over 30 whistleblowers gave them evidence to name these names. A judge eventually ruled out the Bear individuals as defendants but at least they tried.

The NY AG went on to tell Martin Smith that he’s not ruling out brining future charges against individuals – that is if more whistleblowers come forward. OK well how about going out to find some whistleblowers on your own like the DOJ had done in insider trading cases. Arrest one – I’d start with the Bear Stearns desk traders Jeff and Mike who were on the frontline of the double dipping scheme and see if they flip on bigger players like Marano or even Warren Spector his boss.

The NY AG is also racing against a time clock – which he points out in his Frontline interview – because of statute of limitations. Now if he tried to use civil RICO as a charge he could buy himself time.

The NY AG’s brag about coming up with a ‘platform case’, that shows this was a systemic problem, is a deviation to something former DOJ chief, Larry Thompson, put out in 2003 called the Thompson Memo. This memo told prosecutors how to negotiate with intuitions when deciding to sue or make plea deals in cases where their employees committed crimes. The heart of the directive was to find the individuals to charge criminally because by charging the whole bank, who has tons of employees who did NO harm, the effect of punitive justice is diminished by job and net worth loss to innocent people. Thompson was involved in the litigation that brought down Enron and saw Arthur Anderson destroyed as a result. The Thompson memo got watered down as new DOJ heads came in and I’d be scared to death to see what a Lanny Breuer (current head of DOJ criminal division) memo would look like.

The take away from Smith’s Frontline film was: The American people still don’t have a good reason for not going after bankers individually for financial crimes. And the excuse Lanny Breuer gave about worrying if it would crack the US financial system is making people want to scream even louder about serious problems in the leaders of our Justice departments.

Martin Smith interviewed me about where Tom, Jeff, and Mike went after Bear Stearns (all have million jobs at other big bank institutions) but none of that material made it into the film. Likely because he’d need another half an hour just to show all the evidence against this crew of former Bear traders. Until the NY AG charges these men with a crime that could cost them jail time or sues them so they lose their securities license and personally bankrupts them – his platform case is another way of saying I haven’t used the unique powers my job enables me to do yet.

San Bernardino County Backs Down From Shoddy VC Plan Using Eminent Domain

A Southern California government official from a depressed county tried to go up against Wall Street this summer when he shocked the mortgage bond community by telling them he was thinking about using eminent domain to force-buy underwater mortgages out of the securities at a discount. That man was Greg Devereaux, a former city planner, who is the appointed CEO of San Bernardino County located in the Inland Empire of Southern California. It’s one of the largest counties in the state who had one of it’s larger cities file bankruptcy last year. On Thursday at a public hearing Devereaux did a bit of a 180 and basically said he couldn’t take the risk of using eminent domain because Wall Street would attack it and his constituents were voicing they really didn’t want to do it.

I was on the ground for six weeks this summer following the hearings and community reaction in the county. Viewers of RT’s Keiser Report saw me explain how these good-hearted muni officials were about to get bamboozled by a San Francisco venture capitalist with a firm call Mortgage Resolution Partners. What we were really faced with was two finance groups duking it out over profits with financial screwed homeowners as the sucker in the middle. MRP played San Bernardino’s heart-strings by promising to clean out the abundance of underwater homes in the county that were keeping real estate recovery at a stall.

Except as I exposed on Keiser Report, MRP was really just setting themselves up to make a double-digit profit if they could get Devereaux to break contract law and buy the underwater mortgages at a discount to their value within the mortgage bond. Meaning RMBS holders, which include pension funds, could get their investment wiped out. By breaking contract law San Bernardino County risked high borrowing rates via banks afraid to do business with anyone in the county going forward. The kicker was MRP wasn’t going to buy mortgages with borrowers who were not paying; instead they wanted the cream of the crop, the paying overvalued mortgages, so they could off load them down the road to the FHA or GSE’s. There wasn’t a lot of risk for MRP in the plan but there sure was for the local residents.

San Bernardino County spokesperson David Wert wrote in an email after the vote to drop eminent domain:

“Board Chairman Greg Devereaux pointed out many experts have warned the use of eminent domain would destabilize an already weak local housing market and even worsen the mortgage crisis. At the same time, very few local homeowners and other stakeholders expressed support for the use of eminent domain. Many, in fact, opposed such a strategy.”

When the plan was first presented the local Inland Emprie press and liberal media like Huffington Post were working like public relation dogs for MRP. Glossing over the fine print details of how a homeowner could get totally screwed if their loan was bought via eminent domain. But as my peers in the financial press picked up on what was really going on and we saw Reuters to the Wall Street Journal writing about the evil pitfalls residents would face and it got local business owners, real estate agents, or homeowners not underwater really worried.

Devereaux says he never fully committed to do MRP’s plan but he did think it was worth telling his residents about so a public debate could happen. That debate turned into a somewhat union ball breaking style of backroom convos by the wall street lobby groups with relators and homeowners across the county. Devereaux’s office told me SIFMA even threaten them ‘not to talk about eminent domain publically’ or all holy hell would break out for their local economy. That threat didn’t bode well with progressive minded Devereaux who thinks governments job is to share openly with it’s resident (shocking right). The county was hoping at some point data would come out that showed the plan was good for the community as a whole but bad data kept showing up in the press that made Devereaux look like he’d be Darth Vadar leading the evil empire if he just started condemning mortgages with his power of eminent domain.

San Bernardino County has some of the poorest neighborhoods in southern California mixed in with a few gem upper middle class cities like Lake Arrowhead and Redlands. Cites that didn’t allow a housing boom in the last decade and were not packed with underwater homeowners.

These cities are not particularly populated with people who understand high finance like you’d see in Fairfield County, CT but they are college educated, often Republican, and had to do some quick education on how a mortgage bond security worked. The best thing MRP did by coming to town was educate San Bernardino County residents how high finance products work so they can make better decisions the next time a stranger shows up looking like a healer with a quick fix plan to ‘help’ their troubled economy.

Devereaux said at the last hearing even he got an education from bond lobby groups like SIFMA and SIFMA sure now knows where San Bernardino is now. The county is still seeking housing fix proposals from the private sector–this time they will ask for firms to included a risk assessment in their plans. Good for Devereaux.

As for MRP they put out a spin statement this week that said in the last year they’ve talked to around 30 cities who are still entertaining their eminent domain housing plan – although Chicago has also turned them down. Tad Friend at The New Yorker was able to follow Steven Gluckstern of MRP around late this summer and detailed how a northern cal town, Salinas, was interested at first but after news reports started to show flaws and consequences to his plan they backed down.

I found it interesting Gluckstern choose a journalist, Tad Friend, who doesn’t have a history of reporting on high-finance or wall street firms to cover his agenda. Friend is a good story teller who was able to quote Gluckstern admitting the homeowner would not have a choice if their home was bought out of the RMBS via eminent domain. A glaring fact that hadn’t been reported yet. The New Yorker also doesn’t tell the reader where some of their bold statistical statements come from. Such as “yet even as homes prices have risen for six of the past seven months, twenty person of America’s homeowners remain underwater”. That kind of statement is just to broad and the reporter should know he needed to source in the story where that data comes from so the reader can judge its accuracy. (Friend has now answered he used corelogic numbers for his story but I think it should have been stated in the print) This is the kind of thing we saw Gluckstern do all last year. Throw up numbers that reporters had to go back and fact check. Jon Prior at Housingwire found his number of underwater homes for San Bernardino County included Riverside, which is not in San Bernardino County, and his 60% underwater projection was really only a 43% number according to corelogic.

America is founded on free market capitalism. It’s interesting to watch who’s still fighting to keep that alive these days.

Editors Note: I grew up in a resort mountain community called Lake Arrowhead that is in San Bernardino County. I haven’t lived there in near 20 years but I applaud its residents for doing their homework and using their voices to stop a plan they didn’t think would benefit their community. It was also refreshing to see that government listened to them.

Frontline: The Untouchables – Exposes how Wall Streeters Commit Fraud but Escape Jail

UPDATE 1-23-13 5pm: The Washington Post is reporting the DOJ’s Lanny Breuer, who was highlighted in The Untouchables, is stepping down. Now reporters had heard he was on his way out for a bit so WAPO could be reporting old news but it sure makes the Frontline film and my reporting seem to have made quite a stink at the DOJ today. Is this a case were great investigative journalism actually went to work for the American people?

1-23-13: There is a live chat with The Untouchables film maker Martin Smith today. I’d ask him if he thinks DOJ’s Lanny Breuer should still have his job.

Original Text
Tom Marano and his team of bandits at Bears Stearns mortgage trading desk took Wall Street for a ride in the last decade. I first broke news about them stealing billions from their own clients, which included pension funds, in January 2011 for The Atlantic. Tonight you’ll see how widespread their action went in a Frontline documentary film called The Untouchables.

Emmy winning documentary film maker Martin Smith contacted me this summer about my reporting on the Bear Stearns traders and the saga it entailed for JP Morgan. A bank who is now facing a Civil fraud suit by the NY AG, has $140 billion in civil RMBS fraud suits against them, and has setteled with the SEC for the double dipping scheme that attorney Eric Haas at Paterson Belknap first figured out.

When I first came about this story in early 2010 Reuters and Fortune, who asked me to pitch them, passed on it because they said the topic was too complicated. But it took only 24 hours for Dan Indivilgo (who is now writing for Reuters BreakingViews) to figure out this was a blockbuster piece of reporting and as a business editor at The Atlantic he convinced them to buy it. I only made $150 selling the story to The Atlantic instead of the few thousand dollars I’d make if I had sold it to a trade publication behind a paywall but I knew this story just had to printed online for the world to read. And they did.

Hundreds of Wall Streeters started to email or call me after they read it. People who might have never read my byline at the New York Post or Hearst Newspapers were calling to see what else I had on the outright fraud these financial titans committed. Their big takeaway was “I knew those Bear traders were always making too much money but I could not figure out how.” And the civil securities lawyers who called just wanted to play catch up to the sordid details the lawyers at Patterson Belknap had already figured out for their clients the mortgage bond insurers. Even the FHFA had an analyst call me to find out behind the scenes info and then copied Patersons Belknap’s suit when then filed for around $22 billion in civil fraud against JP Morgan.

You can see whistleblowers on camera tonight telling details I first reported about the level of due diligence Bear (and other banks) hired to mask the level of out right fraudulent loans the traders were aware of before they even put them into the mortgage securities they sold to the public.

Yet still we saw the NY AG only sue for civil fraud and not criminal fraud. Filmmaker Martin Smith got people to admit the DOJ was afraid if they actually charged these Wall Street bad boys with criminal fraud it would rock the financial system. An absurd notion for the DOJ to even consider. They are not bank regulators or butt boys for the banks like Tim Geithner. They are suppose to go after crime regardless of how it effects an industry. I consider this fraud against the American people– the DOJ didn’t do their job when the evidence was handed to them by reporters like me and Nick Verbitsky and sharp lawyers like the team at Patterson Belkanp.

But the real want-to-make-me-throw-up moment in the film came when I saw the DOJ’s Lanny Breurer tell Martin Smith he didn’t think journalist had found any whistleblowers who the DOJ hadn’t already interviewed. That’s was either an out right lie or he’s really in denial because as Nick Verbitsky said in the film he knows his unnamed whistleblowers were never contacted by the DOJ even though the lawyers at Paterson Belknap eventually got some them on the record for their civil suit against Bear Stearns/ JP Morgan. I second that…the DOJ has flat out not tried to reach a single whistleblower in my series of reporting on Bear Stearns/ EMC / JP Morgan.

The failure of the DOJ is the real crime we should never forget.

Editors Note:This news publication is funded by the generous donations of my readers. If you like what you saw in the Frontline Film or news report you see on this site please donate. You can do so via Paypal at teribuhl@gmail.com. Micro donations of $25 plus go a long way when readers like you contribute.

Regulators Investigate Sun Trust Bank for Fraud

UPDATE 10-11-13: SunTrust was forced to settle with the government over the actions in this story which was first reported at Growth Capitalist. They had to pay over $1 billion dollars which lead to a negative 33 cent per share hit to earnings. It’s unclear if the whistleblowers will reap any reward from this sizable settlement.

UPDATE: You can see me talk about my Sun Trust investigation on RT’s top TV show Keiser Report today. Max Keiser also interviews me about the impact of the SEC investigation into JP Morgan – which I first reported on his show last year.

Original Text
A mid-size bank touted as a growth stock by analyst this year is under SEC investigation for selling billions of Alt-A loans labeled as Prime loans to Fannie Mae. I reported on the SEC investigation into SunTrust Bank on November 5th at Growth Capitalist.

According to whistleblowers, Atlanta-based SunTrust took advantage of a Fannie Mae program designed for the bank’s best of the best borrowers. They called it the Agency Shortcut Mortgage. In 2006, with pressure to keep earnings up as banks like Countrywide were laps head in earnings from resi mortgage origination, borrowers with good credit scores became a target for fraud by SunTrust. The bank needed high credit scores to get entry into the Agency Shortcut Mortgage program but after that SunTrust staff could manipulate the income and assets of the borrowers and force the GSE program to buy the loan. The whistleblower complaint alleges SunTrust did this in the billions from 06 to early 08.

Whistleblowers claim the highest level of management was directing the retail arm, wholesale, and outside mortgage brokers how to beat the Fannie Mae program and were encouraged to re-enter borrower income or assets over and over until the loan qualified. These whistleblowers say, once it was accepted in the Shortcut program underwriters were not allowed to ask for follow-up stated income docs like tax returns and bank statements. That’s because the Shortcut approvals were being done by SunTrust loan officers, branch managers, & mortgage brokers who were paid on volume instead of the bank’s underwriters who should have been hitting the approve button. These SunTrust interested parties basically circumvented the underwriting process by committing automated underwriting fraud. The result was Fannie thought it was buying tons of great prime loans from SunTrust.

It wasn’t till early 2008–right before the Shortcut program was terminated–that Fannie Mae limited the number of times their DU system could be re-run for a particular borrower to fifteen. While fifteen seems high Fannie took into consideration the number of hands that touched a loan from origination to funding. Subtle changes are often made in the underwriting process but the goal of Shortcut was to cut down on the detailed document request underwriters usually did. What this highlights is the laddering of income and assets loan officers were doing on Shortcut loans to achieve the ‘right mix’ that tripped Fannie’s DU system into approving the Shortcut loan–an abuse that must have been clear to Fannie executives who oversaw Shortcut. This questions the very core of Fannie’s system of risk controls along with how much their CEO, Daniel Mudd, knew about the health of his bank and didn’t disclose to shareholders.

SunTrust whistleblowers worked for a year to find a lawyer to get their case in front of U.S. regulators. The thought that the bank intentionally planned to cheat Fannie’s computerized underwriting acceptance program so they could improve origination volume was hard to sallow for a bank that’s managed to escape regulatory sanctions so far. I’ve watched whistleblower complaints filed for years now and the SEC will often sit on them for a long time before they start to investigate but with SunTrust the regulator got involved within only a few months. That’s because the mortgage fraud task force was already aware of other large residential mortgage originators doing the same thing. We saw proof of this when the DOJ acted last month and sued Bank of America for the sins of Countrywide’s ‘Hustle program’ with the GSEs.

Banks cheating to earn profits isn’t a new concept for main street to understand but how the Government Sponsored Entities allowed themselves to be cheated opens a whole other can of worms. In my report , at Growth Capitalist, we show a former regulatory enforcement lawyer discuss how and why Fannie isn’t the innocent victim here. On top of that think of the mortgage insurance that was sold alongside these loans which didn’t factor in enough risk. Then there are the second loans place on top of these Shortcut loans that another lender would have thought they were lending against after a prime loan was issued but instead it was a lower quality loan.

SunTrust told investors in September they thought they were through GSE putbacks and added hundreds of millions more to their putback reserves. But my story at Growth Capitalist questions how that could be true when they are faced with an SEC settlement on billions in loans executed with fraud. The bank’s Q3 earnings presentation shows putpacks have been requested on over $6 billion of resi loans with most coming from the GSE.

Editors Note: My story at www.growthcapitalist.com is behind a paywall that only paid subscribers can read. Great investigate journalism is with worth paying for and there are a ton more details in the story that make the subscription worth it.

Where the SEC Puts the JP Morgan-Bear Stearns Settlement Matters

JP Morgan disclosed they reached an agreement with the SEC today for the double-dipping scheme run by Bear Stearns mortgage traders. This was where the traders under Tom Marano kept billions of dollars that were supposed to go back to RMBS investors when resi-loans defaulted in the first 90 days. The SEC hasn’t officially accepted the deal yet and a court still has to approve it so we have ZERO info on how much Jamie Dimon’s bank has to pay and if there are any punitive damages.

Unfortunately with SEC settlements the bank doesn’t admit any wrong doing. So what’s important to watch here is where the SEC slots the funds. Will they place millions in their general fund or will the money go into something called a ‘fair fund’. Sarbanes-Oxley actually gave the SEC a mechanism to create a fund for aggrieved investors so they can get some restitution dollars back. In all fairness any money the SEC gets out of JP Morgan should be put back into the RMBS trust and paid out according to the waterfall for each security. It would be a little complicated to do but hey it’s the SEC and I’m sure they can hire a forensic accountant to sort it out. If that happens then the state and federal judges ruling on $140 billion of rmbs civil suits against the bank (it went up $20 billion in Q3 according to their 10-Q filing) could see it as an admission of guilt, which would really bolster the civil suits with fraud claims who are subject to triple damages.

Sadley we are not expecting JP Morgan to be fined by the SEC anywhere near the billions they should be. The bank’s 10-Q shows they only added $700 million to their litigation reserves in Q3 for a total of up to $6bn over what they have already expensed.

A few naive reporters have written stories today that the SEC settlement shows JP Morgan is getting out of the woods from its rmbs fraud and putback suits but it’s actually the opposite. The SEC’s suit doesn’t affect the billions the NY AG is trying to suck out of JP Morgan for the same crimes—he did sue for around $22 billion. But JPM’s real worry comes in the hefty payout they will have to pay when they settle with the monolines, institutional investors, and even the FHFA who sued for Fannie Mae and Freddie Mac. JP Morgan has been fighting some of these rmbs fraud cases for five years now and a few are set for trial next year.

Today’s news is really about Jamie Dimon finally admitting Bear Stearns traders did something really wrong to its own investors and JP Morgan is going to have to pay a lot for it.

Update 11-13-12: The WSJ is still running PR for Jamie Dimon and yesterday tried to tell readers that Bear Stearns executives won’t and shouldn’t be charged criminally. This is beyond embarrassing for the WSJ reporters as viewers of RT’s Keiser Report know I’ve been explaining for two years how much evidence the DOJ would have if they wanted to charge Tom Marano and his team. Nick Verbitsky, documentary film maker of the Bear Stearns movie ‘Confidence Game‘ even commented on the absurd reporting by the WSJ. It’s clear we are not going to get any decent reporting or analysis out of the WSJ but Reuters legal columnist, Alison Frankel has a great analysis on why JP Morgan is likely to pay billions in RMBS putbacks because of Bear’s fraud. Read it and you’ll see why setting aside even $6 billion in litigation reserves isn’t enough for $JPM.