The
government-brokered transaction not only let JPMorgan pay less than
market value for its competitor but also shifted responsibility for some
of the toxic Bear Stearns liabilities it didn't want to the Federal
Reserve.
It was a sweetheart proposition, quickly baptized by New
York and Washington power players as a too-good-to-be-fair "Jamie deal,"
after Jamie Dimon, the chief executive of JPMorgan.
Four-and-a-half years later, the other shoe in the Jamie deal may finally be dropping.
On
Monday, New York State Attorney General Eric Schneiderman filed a
lawsuit against JPMorgan, as the legal successor to Bear Stearns, asking
the bank to pay some $22.5 billion to make up for alleged malfeasance
by Bear Stearns' mortgage securitization unit in how it sold its
financial products.
Specifically, New York is alleging that Bear
Stearns committed fraud by misleading clients about the underwriting
standards used to construct mortgage-backed bonds, even as the bank
systematically abandoned any semblance of quality control over loans it
picked to churn into securities.
The lawsuit states that the
losses on mortgage-backed securities issued by Bear Stearns were
"astounding," totaling more than a quarter of the principal balance
being packaged, and its claims that those losses were "caused, directly
or indirectly, by the fraudulent and deceptive acts."
Perhaps the
most damning evidence in the lawsuit comes from allegations the bank
knew just how bad the products it was offering clients were, and it
includes an email in which a bank employee allegedly referred to a
securitized product as a "sack of sh-t."
JPMorgan expressed dismay at the New York State litigation.
"We're
disappointed that the NYAG decided to pursue its civil action without
ever offering us an opportunity to rebut the claims and without
developing a full record -- instead relying on recycled claims already
made by private plaintiffs," a JPMorgan spokesman said in a statement.
"We
will nonetheless continue to work with members of the president's RMBS
Working Group and are fully cooperating with their inquiries," he added.
The
"RMBS Working Group" JPMorgan was referring to is the initiative under
which Schneiderman's lawsuit is being brought, which was created earlier
this year to consolidate various state and federal investigations
looking at fraud in that market. Attorney General Schneiderman presides
over that working group.
"We intend to follow up with similar
actions against other sponsors and underwriters of" residential
mortgage-backed securities, an official in the attorney general's office
told the Wall Street Journal.
Pundits were divided Tuesday as to the level of damage the lawsuit would cause JPMorgan.
Commenting on the suit, BBC News' business editor Robert Peston
said it disclosed
"a manic and frenzied culture of procuring and packaging as many
mortgages as humanly possible, to maintain the bonds spewing from the
investment bank, to generate as much short-term profit as humanly
possible," with allegations he described as "jaw-dropping."
"All
this is a bit like the fifth installment in a series of horror films,
with each succeeding production gorier than the preceding one," he said.
Others
caught the fact that Schneiderman's promise to go after other issuers
was a warning shot to the financial services industry.
The
Campaign for a Fair Settlement, an activist organization, also told the
Journal that the suit is "an encouraging first step to holding Wall
Street banks accountable for [their] reckless and deceitful practices."
But
not everyone was convinced the suit was such a win-win proposition for
the government, or that JPMorgan would have to pay too dearly as a
result.
Wall Street bankers cited by Politico
told that newspaper
the suit was being rolled out due to political motivations designed to
appear as cracking down on finance, and not on its merits. That view was
echoed in the liberal-leaning financial blogosphere, with
Yves Smith at nakedcapitalism.com saying the timing of the suit was not only suspect, but
that it showed "Eric Schneiderman is living up to his track record as an 'all hat, no cattle' prosecutor."
A fitting analogy in a case where the cows seem to be finally coming home.
JPMorgan Chase & Co. shares were down 19 cents to $40.76 each, during lunchtime trading on the New York Stock Exchange.
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