» Analysis &
Opinion Home

Opinion

Bethany McLean

Follow Bethany McLean

Case against Bear and JPMorgan provides little cheer

By Bethany McLean

October 10, 2012

Email

Print

bear stearns
| eric
schneiderman | fraud | jp morgan | mortgages

Last week, New York Attorney General Eric Schneiderman,
who is the co-chairman of the Residential Mortgage-Backed Securities Working
Group – which President Obama formed earlier this year to investigate who
was responsible for the misconduct that led to the financial crisis – filed
a
complaint against JPMorgan Chase. The complaint, which seeks an unspecified
amount in damages (but says that investors lost $22.5 billion), alleges
widespread wrongdoing at Bear Stearns in the run-up to the financial crisis.
JPMorgan Chase, of course, acquired Bear in 2008. Apparently, this is just the
beginning of a Schneiderman onslaught. “We do expect this to be a matter of very
significant liability, and there are others to come that will also reflect the
same quantum of damages,” Schneiderman said in an interview with Bloomberg
Television. “We’re looking at tens of billions of dollars, not just by one
institution, but by quite a few.”

The prevailing opinion
seems to be, Yay! Someone is finally making, or at least trying to make, the
banks pay for their sins. But while there is one big positive to the complaint,
overall I don’t think there’s any reason to cheer.

Schneiderman’s case clearly lays out the alleged bad behavior at the old Bear
Stearns. Although Bear promised investors it was doing due diligence on the
mortgages it purchased, it wasn’t. Defendants “systematically failed to fully
evaluate the loans, largely ignored the defects that their limited review did
uncover, and kept investors in the dark about both the inadequacy of their
review procedures and the defects in the underlying loans,” alleges the
complaint. Even worse, Bear would make deals with the sellers of mortgages in
which it would force them to make a payment for failed mortgages, but instead of
taking the bad loan out of the trust, Bear would just keep the money – even
though both Bear’s lawyers and its accountants (this is truly
stunning), according to Schneiderman’s case, warned them that wasn’t OK.

The complaint shows just how complicit the Bear bankers were in the
proliferation of bad loans that almost took down the economy, and that alone
makes it valuable. “He’s finally telling the story so that people can understand
the depth and magnitude of what went on,” says Eliot Spitzer, who had
Schneiderman’s job after the dot-com bust.

But beyond that, there’s not much to applaud. The biggest flaw is that
Schneiderman decided not to name any individuals, a practice that is sadly all
too common in financial fraud cases. The New York Times argued
that it’s a strength that the case doesn’t focus on individuals and specifics,
and instead alleges a broad pattern of fraud. But naming names is powerful.
Anonymity is weak, and that is amplified when the generalized wrongdoing
allegedly occurred at a now-defunct bank. In addition, the lack of names is
weird. How could the actions alleged in the complaint have been accomplished if
real people didn’t do them?

Schneiderman’s office also brought charges under a specific New York State
law called the Martin Act. The Martin Act doesn’t require prosecutors to show
that the defendants intended to commit fraud. This seems ridiculous. If Bear
employees committed the acts detailed in the complaint, especially pocketing
money that should have gone into investors’ pockets, against the warnings of
lawyers and accountants, how can they have intended anything other than
fraud?

Which, of course, raises a few other questions. Chief among them: Why haven’t
Justice Department investigators brought criminal charges, and why hasn’t the
Securities and Exchange Commission even brought civil charges? Technically
speaking, both are also members of the Residential Mortgage-Backed Securities
Working Group, but both also have been conducting their own investigations since
the crisis hit. The answer cannot be that Schneiderman discovered something new.
JPMorgan has complained
that his suit relies on “recycled claims already made by private plaintiffs”
and, well, it does. The notion that investment banks were knowingly putting bad
loans into securitizations has been public knowledge since the fall of 2010.
That was when executives from a company called Clayton Holdings, which was
retained by many of the big banks to do due diligence on the mortgages they were
buying, told
the Financial Crisis Inquiry Commission that Wall Street knew that almost
one-third of the mortgages they were securitizing didn’t meet their own
standards. Spitzer wrote a column
for Slate calling the documents the “Rosetta stone” because he thought
they provided such a clear road map for investigators. That’s not all.
Schneiderman’s predecessor, Andrew Cuomo, actually entered into a cooperation
agreement with Clayton back in 2008! Did it really take over four years to
put together a complaint that doesn’t even name real people?

As for the part about Bear pocketing money that should have gone to
investors, that’s been well known since at least early 2011, when Teri Buhl did
an in-depth
piece for the Atlantic on a lawsuit that bond insurer Ambac filed
against JPMorgan in 2008, which was unsealed in early 2011. Buhl wrote that Bear
traders were “pocketing cash that should have gone to securities holders.” And
the Ambac lawsuit named names!

In other words, everyone has had plenty of time.

So there are a couple of possibilities. One is that Justice and/or the SEC
will follow up with their own charges now that Schneiderman has laid the
groundwork. Maybe. But that doesn’t make a lot of sense given the widespread
availability of the information in his lawsuit and the length of time that has
passed since the financial crisis. It’s an old saw in legal circles that the
more time goes by, the harder it is to file criminal charges. By now, it will
feel strange if the Justice Department yanks four people who worked at the old
Bear and in effect says: “You and only you are going to take the fall for the
entire financial crisis!”

Another possibility is that those who say
that federal agencies simply don’t have the appetite to pursue the banks are
right. Whether that’s because they lack the resources and the political will, or
because bringing criminal charges against individuals would inexorably lead up
the chain to the institution, which would destroy it, and no one wants to see
that happen, it doesn’t much matter. If Schneiderman’s lawsuit is the best we
can manage under those constraints, then that’s a tragedy.

A third possibility is that there’s more nuance to what happened than
Schneiderman’s suit allows. (JPMorgan, for its part, has said it will contest
the charges.) Some would still say that’s all right, because if there are 50
shades of bad behavior, this is clearly one of them; so even if it’s not the
darkest, let’s make the bankers pay up. The problem is that it’s not the bankers
who will pay. It’s not the individuals who did these awful things, or former
Bear Stearns executives who may have sanctioned it knowingly or unknowingly, or
even current JPMorgan executives who will pay the big fine that will likely be
the end result of all this. It’s JPMorgan’s current shareholders, which include
mutual funds like indexers Vanguard and Wellington. In other words, we, the
American investor class, are the ones who are going to pay. And if Schneiderman
does indeed apply this same method to other banks, well, then we’ll pay even
more. I fail to understand why this is justice, or why this will do anything to
dissuade bad behavior in the future.

I’m also bothered by what happened after Schneiderman filed his suit. First,
JPMorgan Chase raised a stink, because in the minds of many JPMorgan executives,
they performed a public service by purchasing Bear and have already paid enough
for its misdeeds. Maybe it’s not fair to blame Schneiderman’s office for
responding with a press
release trumpeting the myriad ways in which JPMorgan Chase benefited from
government assistance. But whether you love or hate the big banks, the alleged
wrongdoing that happened at Bear has nothing to do with whether or not JPMorgan
Chase benefited from government help. The punishment the bank should face for
any misdeeds should be purely a matter of law, not public opinion about the bank
bailout. Otherwise, we risk bastardizing the law.

Finally, I worry that this is all a classic “watch the birdie” exercise: Hey,
folks, look over here at this facsimile of justice! Making the big banks pay
somehow sure feels good, and if you don’t look too closely, it may even distract
you from the big questions. Namely, what should a financial institution that
serves the needs of businesses and consumers—instead of one that uses us as
fodder for its own profits and executive bonuses – look like? And how do we
get from here to there? Instead, we’re going to pay up, and in exchange, get
business as usual. That’s not a good deal.

PHOTO: The Bear Stearns logo is seen at the lobby of the headquarters in
New York, March 26, 2008.  REUTERS/Shannon
Stapleton

« Previous Post

Comments

2 comments so far |
Comments RSS

Oct 10, 2012

8:35 pm UTC

Due to the complete absence of any serious legal action against the shameless
perpetration of fraud on Wall Street since the Collapse, I’m inclined to take a
cynical view of Schneiderman’s investigation.

The Martin Act benefits the banks be keeping anyone in banking from getting
hurt. Making an issue of fraud conducted by the now defunct Bear Stearns
prevents harm at the corporate level.

American citizens and investors would be better served by using RICO to go
after bad deeds committed by banks that are still fully operational… but these
days, the law does not serve citizens or investors.

American law serves a new master.

Posted by breezinthru |
Report
as abusive

Oct 11, 2012

2:29 am UTC

As long as there is a money monopoly given to a select irresponsible few, and
that irresponsibility is insured by the forced collection of taxes, corruption
will never cease or decline. Nor will any investigation shed light on or even
make any discernible sense out of it all. Repealing all legal tender laws and
allowing currency competition is the only way to solve it. But wait, how would
they collect taxes then?

Posted by
LysanderTucker | Report
as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion,
anecdotes, links and data. If you see a comment that you believe is irrelevant
or inappropriate, you can flag it to our editors by using the report abuse
links. Views expressed in the comments do not represent those of Reuters. For
more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Author Profile

Bethany McLean is a contributing editor at
Vanity Fair, and co-author with Joe Nocera of "All the Devils are Here: The
Hidden History of the Financial Crisis." Her first book, "The Smartest Guys
in the Room," co-written with Peter Elkind, became an Academy
Award-nominated documentary.

ANY OPINIONS EXPRESSED HERE ARE THE AUTHOR’S OWN.

Recent Posts

Case
against Bear and JPMorgan provides little cheer

The
Pension Destabilization Act

Was
Geithner ‘forceful’ on Libor?

Should
Goldman Sachs go out of business?

Student
debt could hobble the economy

More Reuters News

IMF calls for action as euro zone crisis festers

JPMorgan's Dimon hits back at government over Bear Stearns
suit

Analysis: BAE-EADS merger collapse shifts focus to smaller
deals

S&P cuts Spain credit rating to near junk

Turkey briefly detains Syrian plane as tension
heightens

Tag Cloud

banking bankruptcy
barclays bear
stearns bill gross
citigroup dodd-frank
efsf elections eric
schneiderman european
debt euro zone fannie mae
financial
crisis fraud freddie
mac goldman
sachs highway
act housing
crisis john
mccain jon
corzine jp morgan leverage libor
scandal mf global mitt
romney mortgages mortgage
settlement newt
gingrich pensions regulation
sec securities
and exchange commission student
debt timothy
geithner valuations

Archives

October
2012

August 2012

July 2012

May 2012

March 2012

February
2012

January
2012

November
2011