Told You So: SEC Wants JP Morgan to Pay for Bear Stearns Sins

Last night the Financial Times broke news Jamie Dimon is willing to admit that maybe the Bear Stearns mortgage traders really did break securities laws and he should settle with the Securities & Exchange Commission. What the FT forgot to mention was I was the lone reporter in late January 2011 who reported JPM was under SEC investigation for this. A story I continued to report and warned on for the last two years at DealFlow Media and on RT’s top financial news show Keiser Report.

Most of my peers in the financial press have been afraid to report on this story. Even when JP Morgan admitted in their own 1st quarter filling this year that they’d received a wells notice –which means their regulator told them they are going to be sued if they don’t settle. Once again a series of my reporting on a financial institution committing fraud was proven right. The only thing I don’t know is how many millions the SEC will accept as settlement for these crimes against Bears own investors. The amount of dollars JPM pays the SEC isn’t that important though because the simple fact that they are willing to admit it wasn’t ok for Bear Stearns traders, under Tom Marano, to steal billions from their own clients gives the $100 billionish in civil rmbs fraud suits, filed by investors, a huge negotiating advantage.

The WSJ wrote today that people close to the SEC settlement talks told them the investigation was over, “whether Bear Stearns got compensation from lender for bad loans it had purchased to bundle into mortgage-backed securities, but then failed to pass that money on to investors by putting it into the trust managing the securities.” The WSJ actually learned about this when I first went on Max Keiser’s show last year, multiple times, and told his millions of viewers this is what the SEC was investigating. Then the WSJ read my story in May about JPM getting a Wells Notice.

A sad fact to the state of journalism in covering this story is Tom Marano, Mike Nierenberg, and Jeff Verschielser’s attorneys have done a good job of keeping their names out of the press. The day I broke my first story on the subject at The Atlantic we actually reported an update to the story that the SEC was investigating. That’s because I was able to confirm the SEC called people involved in the situation and started to interview them the day I reported the story. It ran for about 24 hrs and then I watched a pr man from Bank of America, where Nierenberg is head of mortgages, run interference with The Atlantic’s top editors and the SEC update was taken down. A pathetic reaction by the senior editors at The Atlantic.

Max Keiser at international TV network RT trusted my reporting and printed on his website the SEC was now investigating for all the illegal actions I’d just reported. Then my editors at DealFlow Media encouraged me to continue to report out the Bear Stearns traders story at their trade publication The Distressted Debt Report. Jody Shenn at Bloomberg copied some of my reporting on the subject but then dropped off the story. In fact it was really only me and a talented legal columnist at Retuers, Alison Frankel, who continued to report on the impact of the rmbs fraud litigation against JP Morgan.

Still we have no criminal charges filed against Tom Marano’s team and they keep beating motions to add them individually as defendants in civil litigation. I remember feeling a little shocked when I first called Mike Nierenberg’s pr people at BofA to tell them about all the dirty emails and whistleblower testimony I had showing how Mike and Jeff executed this fraud and Mike came back saying ‘I’m not worried about it’. Yep that’s the mindset of Wall Street’s top mortgage executives — it just a cost of doing business and the bank will have to pay for their sins.

JP Morgan was Bear Stearns clearing agent before they bought the bank in March 2008. That means they saw all the toxic rmbs Bear was selling – so I don’t buy the argument that it’s not fair for JP Morgan to pay for Bear’s bad boys. Remember JP Morgan had the chance to settle with the monolines who’d sued for only a little over one billion dollars when they bought Bear in 2008 but choose to rack up millions in legal cost for the last five years and fight these charges. Even after Bear had previously told the monolines ‘ok you kind of caught us’ so we’ll pay back what we stole at cost. Seriously read the Ambac complaint and you’ll see this spelled out. So Jamie Dimon crying wolf that he’s a victim of the US government forcing him to buy Bear Stearns is line of total BS and any reporter who prints that line is only writing pr statements for the nation’s largest bank. Why is it so hard for my peers in the financial press to admit these guys did something really really wrong?

What Bear Stearns Whistleblowers told the SEC: New Details of RMBS Fraud & Cover Up

Remember all those whistleblowers the monolines found in their RMBS fraud litigation against Bear Stearns and JP Morgan? The ones JPM’s lawyers tried to publicly out their names so they’d be afraid to testify in the monoline’s case. Well the bank’s dirty legal tactic didn’t work and newly released whistleblower testimony from people who worked for third-party due diligence firms, hired by Bear to get the mortgage security insurers to back their bonds, shows a whole another layer of orchestrated deceit. One so bold it borders on mafia like RICO actions.

Filed in Connecticut state court at the end of August by monolines lawyers at Patterson Belknap is a motion to enforce a New York subpoena that calls for RMBS due dilly firm, Clayton Holdings, to turn over the historical loan review reports that were sent to Bear Stearns. The motion is on behalf of Ambac; the RMBS insurer who first brought the explosive fraud suit against Bear Stearns traders for stealing billions from their own clients. You know the one that led to JP Morgan, Bears’ successor, telling investors last quarter they now have at least $120 billion of possible mortgage security putback suits they could be forced to pay out. Well it looks like Abmac wants the public to know more of the dirt they have on Bear/JP Morgan because in exhibits with the motion they filed there’s some nasty whistleblower sworn testimony.

Clayton Holdings along with a firm called Watterson Prime were the main third-party firms Bear hired to do re-underwriting due diligence. According to the monoline suits this extra level of inspection was designed to prevent defective loans getting packed into the security in the first place. In the heyday of the mortgage boom there was so much competition to get the RMBS bonds insured and sold Bear came up with a novel ideal of paying for ‘independent reviews’ that the monolines use to do themselves before they got so busy picking which bonds to insure. It was a process Bear claimed would add a level of integrity. But new sworn testimony by whistleblowers from Clayton and Watterson Prime shows this was just a ‘veneer of control’ instead of a practiced method to fret out defective loans.

What’s worse is when Clayton or Watterson Prime due dilly workers actually found the bad loans and coded them in the system (called CLAS for Clayton) their supervisors would change the coding to reflect the loans were ok. This enabled the Bear Stearns traders working under Tom Marano to hide the fact loans they’d bought, from the banks like Greenpoint or Countrywide, were garbage but still went into the security because allegedly Bear traders didn’t want to spend the time or money to go back to the originators and buy quality loans. If the courts find the whistleblower statements are true, it’s a clear violation of the monoline rmbs insurance contracts along with possible insurance fraud and violations of the Martin Act.

The whistleblowers names are redacted in the filing but they swore they worked for both Clayton and Watterson prime as freelance due diligence consultants on loan file reviews for Bear Stearns mortgage securities. Their job was to take the original loan files EMC had used to pick which loans would go into a security and make sure it fit Bear’s underwriting standards. Their testimony says they’d find a file with borrower documents they thought were fraud, report it to their supervisor (such as Mr. Weeks at Watterson Prime) and the supervisor would say just move it along and overlook the documents.

“Usually the instruction were just go ahead and keep it moving, enter the information, we will take care of that with the seller or we will try and get correcting documents later,” states one whistleblower talking about working at Watterson Prime in court filings. “Once a lot of the documents were missing or it was prevalent that we don’t have these documents, we were told to ignore, ignore and grade them as normal.”

But it’s wasn’t just ignoring missing documents that was encouraged. The loan reviewers also stated they’d find W-2’s in the files that were logged at ‘stated loans’ (this mean the borrower just claims his income without documentation) and the W-2’s would contradict what the borrower had stated. Meaning the loan clearly had fraud in it.

The whistleblower says when they told their boss at Clayton or Watterson Prime this they were told to “pull out those documents”.
“We would put them in a pile and either they shredded them or they disappeared. They were destroyed but it was not by the underwriter,” said the whistleblower as he testified to how the due dilly firms covered up Bears bad loans for them.

Another whistleblower said at Clayton they were berated in front of their team if they didn’t rate the loan files as normal and feared not getting more contract work if they didn’t find creative ways to make the loans look ok. One method was in the case of couples getting a mortgage; they used the income of one and the credit rating of the other to make the quality rating match up as normal. This process was known as ‘finding compensating factors”.

“When loans did have deviations from loan to value ratios Bear had set as a standard we were told to find compensating factors and approve the loan anyway. On many jobs our team leaders gave us a cheat sheet of compensation factors to make it easier for us to find them,” says another whistleblower in sworn testimony.

In over 50 pages of testimony we learn the team leaders at Clayton Holdings and Watterson Prime were getting this direction from people on the mortgage team at Bear Stearns. According to people familiar with the suit the Securities and Exchange Commission has already interviewed some of these whistleblowers. And the whistleblowers named names regarding who at Bear Stearns was directing the third-party due dilly firms to change loan files and rate them better quality than they really were. One Bear Stearns executive that showed up in court filings directing the due dilly team to basically lie in their reports was John Mongoluzza.

I was told the SEC interviews were done before JP Morgan announced in their last quarterly financial statements the SEC had them given them a Wells Notice saying they were considering suing them for mortgage security violations relating to Bear Stearns.

Former New York Attorney General Andrew Cuomo told the media a few years ago he’d given Clayton immunity for helping with his investigation into possible criminal wrong doing by banks like Bear Stearns. But no charges were brought by Cuomo before he became Governor and it’s unclear what NY’s new AG will do with Clayton.

Ambac’s latest motion filed in Connecticut state court says Clayton is still playing favs with Bear/EMC/JP Morgan by eagerly assisting their lawyers and ignoring a compulsory subpoena to produce documents to Ambac. Clayton who claims they don’t have files Ambac is asking for magically found one of the whistleblowers personnel files that Bear’s lawyer ended up using to cross examine the whistleblower.

So here we have Clayton handed a get out of jail card from NY’s AG and they uses it to help the alleged criminal (JPM/Bear) hide evidence to possibly avoid losing a mega-billion fraud suit?

A recent Abmac filing says they reviewed 5,000 loan files valued at around $2 billion and 85% of the loans had deficiencies problems that Bear should have known were there and thus never put the loan in the security in the first place. Last week Reuters legal columnist Alison Frankel found a new lawsuit filed with similar allegations against Bear/JPM by the RMBS trustee for pension fund investor Baupost. The suit claims after they reviewed Bear/EMC loan files they found an alarming 88% breach rate of the loans in the mortgage securities. So now we have monoline insurers AND investors finding similar malfeasance in the methods of creating and selling RMBS by Bear Stearns.

The examples of cover up described in the recently filed whistleblowers testimony runs deep. Now that I’ve confirmed the SEC has interviewed these whistleblowers we have to wonder if JP Morgan is aggressively negotiating for a settlement or if the SEC is waiting to file suit because it doesn’t want to publicly shame JP Morgan with a securities violation charge before the election. Just think if Bear’s insurers or investors had been given the chance to see Clayton or Watterson Prime due dilly reports that weren’t manipulated – would they have ever bought billions of RMBS from Bear and helped traders under Tom Marano’s team earn millions and go on to run mortgage divisions at Goldman Sachs and Bank of America? It’s those questions investors in Bear’s toxic rmbs hope the SEC doesn’t wait forever on the sidelines to answer.

The case was filed August 24th in Milford,CT Superior Court. Ambac Assurance vs. Clayton Holdings. Ambac’s motion against Clayton asks a CT judge to force Clayton to produce reports reflecting the rate at which Bear Stearns overrode Clayton’s finding with respect to due diligence conducted during the securitization process.