It would be so easy to be cynical about the suit New York
Attorney General Eric Schneiderman brought Monday night against
JPMorgan Chase, seeking to hold the bank liable for the alleged
mortgage securitization fraud committed by Bear Stearns before
JPMorgan acquired Bear in March 2008. I could start with the
political expediency of the 31-page complaint, which, on the eve
of the first presidential debate, provides the Obama
administration with an answer to critics who have accused
regulators of going easy on big banks. Indeed, the case is so
politically charged that, according to Reuters, Schneiderman's
federal colleagues on the administration's mortgage fraud task
force were peeved that the New York AG filed the suit Monday,
ahead of a joint federal-state press conference Tuesday.
Then, of course, there's the content of the complaint. I've
been carping for a long time that regulators were years behind lawyers representing bond insurers and private investors in
mortgage-backed securities. Beginning in 2008 and 2009, private
lawyers marshaled evidence from their own discovery and, later,
from Congress's Financial Crisis Inquiry Commission Report and
the Levin-Coburn Report to produce damning, detailed complaints
against JPMorgan and the other banks involved in securitization.
The New York AG's new complaint cited the FCIC report and the
JPMorgan suit filed in August 2011 by the Federal Housing
Finance Agency, but the AG really owes his biggest debt of
gratitude to the monolines Ambac, Syncora and Assured Guaranty
and their counsel at Patterson Belknap Webb & Tyler. Patterson
has been relentless in its pursuit of Bear Stearns and, by
extension, JPMorgan. Just look at the amended complaint Ambac
filed in New York State Supreme Court in February 2011 against
JPMorgan and the Bear mortgage arm, EMC. It's 160 pages of
brutal accusation, documenting the same theories put forth by
the New York AG -- but in much more detail.
Those colorful quotes in the AG's suit about Bear's "sack of
shit" and "shit breather" securitizations? They're in the Ambac
complaint. So are the AG's allegations that
PricewaterhouseCoopers, engaged in 2006 to offer an opinion of
Bear's put-back practices, told the bank to stop keeping the
money it recovered from the originators of deficient mortgages
for itself and to start passing on its put-back recoveries to
MBS investors. The AG, in other words, did a lot of piggybacking
on other people's work. I didn't see anything in Schneiderman's
complaint that I haven't seen elsewhere in suits against Bear
and JPMorgan.
So why do I believe the AG's suit is so significant? Because
Schneiderman is the first regulator to acknowledge in a legal
complaint that the mortgage securitization process was rotten to
its core. He is the first government official to stand up and
demand legal accountability on behalf of the market and all of
its participants, not just for investors in individual MBS deals
like Goldman's Abacus CDO or the Magnetar and Citigroup CDOs.
"This action is brought by Attorney General Eric T. Schneiderman
on behalf of the people of the State of New York," his complaint
said. "The Attorney General is charged by law with protecting
the integrity of the securities marketplace in the state, as
well as the economic health and well-being of investors who
reside or transact business in the state." You can read that as
boilerplate, or you can think about what it means.
The attorney general doesn't just represent a bond insurer
or a major MBS investor like Dexia or the German regional banks
or even Fannie Mae and Freddie Mac's conservator. They've all
got their own private lawyers pursuing federal securities claims
on their behalf. He doesn't only represent BlackRock or Pimco or
any of the other institutional investor clients of Gibbs & Bruns
who have asserted billions of dollars of put-back claims against
JPMorgan. And he doesn't merely represent the pension funds that
have found MBS class action litigation to be such an exercise in
frustration.
Schneiderman represents all of us -- the people of New York
and all of the investors harmed by the allegedly deceptive
practices of mortgage securitizers. (I'm assuming that the
JPMorgan suit is the first in a series of similar complaints
against MBS issuers.) Everyone who lost even $1 of the $22.5
billion in losses suffered by Bear Stearns mortgage-backed notes
in 2006 and 2007 has an interest in the AG's case. Everyone
whose pension fund or healthcare fund or retirement fund took a
hit when the MBS market collapsed should be rooting for this
litigation to succeed.
If you remember that Schneiderman seeks accountability on
our behalf, his description of Bear's alleged fraud sounds
simple and elegant, not warmed over and rehashed: "The
defendants' misconduct in connection with their due diligence
and quality control processes constituted a systemic fraud on
thousands of investors," the complaint said. "As a result of
this fraudulent misconduct, investors were deceived about the
fundamentally defective character of the mortgages underlying
the RMBS they purchased. Mortgagors defaulted on their loans in
exceedingly large numbers, causing the value of these securities
to plummet, which in turn caused investors in RMBS to incur
monumental losses." On our behalf, Schneiderman is demanding
that JPMorgan repay every penny that Bear unjustly derived from
its alleged fraud.
I fervently hope that when Schneiderman talks about exacting
justice, he means it. I hope that when he and the bank discuss a
resolution of this case, he remembers the awesome responsibility
he holds as our lawyer and his obligation to seek accountability
on our behalf. I also hope that the AG's JPMorgan suit is the
beginning of a new era of MBS litigation, in which regulators
target systemic flaws in the securitization process that sent
housing prices to such unsustainable heights that the entire
economy was wrecked when the balloon fell to earth. The AG's
suit asserts only state-law claims, under the plaintiff-friendly
Martin Act, leaving plenty of room for the Securities and
Exchange Commission and the Justice Department to bring federal
securities cases or enforcement actions against JPMorgan and the
other banks that allegedly profited from deceptive
securitizations.
Only by acknowledging systemic wrongdoing and seeking
systemic accountability can regulators restore confidence in the
system. Cynicism aside, Schneiderman's suit begins that process.
(Reporting by Alison Frankel)
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