Bear Stearns mortgage execs who now head up desks at Goldman, BofA, and Ally Financial have been accused of defrauding investors of millions through shoddy mortgage securities they engineered and sold when they were at Bear Stearns, Teri Buhl at The Atlantic reports.
And Bear’s current parent JPMorgan may be forced to pay.
Emails in a lawsuit unsealed last week show Jamie Dimon’s bank has known about the alleged fraud since 2008, but has fought tooth and nail to keep it “from the public eye through legal manoeuvring,” the Atlantic says.
The lawsuit was filed by mortgage insurer Ambac Assurance against both Bear and JPMorgan back in ’08.
Accusations Against Bear Stearns
Depositions and emails in the complaint show Bear execs’ stunning disregard for contractual obligations to clients, and that high ranking traders knew and even bragged about how they were ripping off their investors.
Incredibly, emails in the lawsuit show Jeff Verschleiser (Senior MD on Bear’s mortgage and asset-backed securities trading desk and head of whole loan trading, and now at Goldman) bragging to senior bankers about $55 million they made by shorting the insurers’ stock.
Emails, like an ’06 one from Bear deal manager Nicolas Smith to Keith Lind, an MD on the trading desk, show that the firm was clearly aware that it was totally disregarding contractual promises and covering up its toxic loans.
Smith even called a particular bond a “sack of sh*t” and said to Lind, “I hope your [sic] making a lot of money off this trade.
Plus, depositions by Bear executives say that high-ranking bankers Mike Nierenberg (former chief of adjustable-rate mortgage trading desk at Bear and now BofA’s head of mortgages and securitization), Jeff Verschleiser, and Tom Marano (Senior MD and Global Head of Mortgages at Bear and now CEO of Ally’s mortgage ops) knew about the decisions their head traders were making.
This is how they alleged to have defrauded the investors, according to the complaint:
Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds.
Traders were essentially double-dipping — getting paid twice on the deal.
Accusations Against JP Morgan
Though JP Morgan’s mortgage desk was’t making these shoddy trades, because it took over Bear, it is now “responsible for the flagrant accounting fraud started by Bear.. and has continued to avoid.”
Importantly, Ambac won a court order in December to add accounting fraud against JP Morgan to its lawsuit.
According to Businessweek, Ambac says JP Morgan demanded the insurer repurchase the toxic mortgages even while the bank refused to buy back the bad loans from bonds that were engineered by Bear.
The insurer says JP Morgan dismissed an external review of the loans’ need to be repurchased and refused to pay Ambac, because the bank knew that if they did buy the loans, it could result in a huge accounting liability that would seriously jepardize their balance sheet.
Ambac claims it lost $600 million and wants $1.2 billion in damages from the soured mortgage securities it invested in and insured against.
Major revelations to come out of the lawsuit include:
- Bear traders described deals they were selling to investors like Ambac, as a “sack of shit.” And they allegedly told their superiors that was the case.
- Senior traders who worked for Marano, were allegedly taking cash that was supposed to be paid to securities holders.
- Nierenberg allegedly played a huge role in “ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm’s due diligence standards.”
- Verschleiser allegedly also knew about these methods and allowed them to happen.
- In ’07, when Ambac began to realise its high-rated bonds were deficient, it demanded Bear provide loan-level detail and review 695 non-performing loans in its portfolio. With those details, Ambac determined 80% of the loans showed an early payment default. Ie. they should have never have been sold in the first place.
- Bear’s auditor, PWC, submitted an internal review back in August ’06 that determined Bear’s repurchase process flagrantly ignored industry due diligence standards. And the bank never revealed these findings to investors.