lunes, 8 de octubre de 2012

lunes, octubre 08, 2012

REVIEW & OUTLOOK

October 7, 2012, 6:47 p.m. ET

Biting the Bank That Saved You
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The feds sue J.P. Morgan for doing the favor of rescuing Bear Stearns.
 


The U.S. Department of Justice and New York Attorney General Eric Schneiderman teamed up last week to sue J.P. Morgan in a headline-grabbing case alleging the fraudulent sale of mortgage-backed securities.



One notable detail: J.P. Morgan didn't sell the securities. The seller was Bear Stearns—yes, the same Bear Stearns that the government persuaded Morgan to buy in 2008. And, yes, the same government that is now participating in the lawsuit against Morgan to answer for stuff Bear did before the government got Morgan to buy it.



The case is even stranger because it rests on highly dubious claims and is being prosecuted in a highly convenient venue. The suit is the product of a joint federal-state task force that President Obama announced to great fanfare in his 2012 State of the Union message to investigate "the abusive lending and packaging of risky mortgages that led to the housing crisis." Mr. Obama's gumshoes still haven't uncovered the mortgage crime of the century, so apparently this lawsuit will have to do a month before Election Day.



Mr. Schneiderman filed the suit in New York court under the state's Martin Act. This means he doesn't have to prove intent, which is convenient because it would not be easy proving that Bear intentionally foisted bad paper on investors when Bear was buying so much bad paper for itself.
 
 

There's an old joke that a prosecutor can indict a ham sandwich, but in this case the government isn't even saying which sandwich. Or how much it cost. Instead, it offers a range of dates plus examples of securities that are likely part of the case.


 
The headline number is $22.5 billion, and that number does appear in the complaint, but only as a general figure for all losses on a broad range of mortgage-backed securities created by Bear. The suit doesn't ask for a specific amount in damages because the government hasn't decided how much of the losses were tied to wrongdoing.



The government makes two general claims: that Bear Stearns promised it would be more careful than it was in selecting mortgages to be included in bundles of loans sold to mainly institutional investors, and that Bear didn't adequately compensate investors for mortgages that should never have been included.



Regarding the first charge, the suit describes a sloppy process of selecting loans, internal discussions about whether and how it could be improved, plus salty emails knocking the quality of some Bear deals. It's far from clear that this proves that Bear's offering documents were fraudulent.



The suit also claims that "a number of studies" show that high default rates "are evidence of faulty underwriting." Well, high default rates are certainly evidence that a housing bubble burst, but to win in court doesn't a prosecutor need to show particular people committing particular acts?


 
As for the second claim, it hangs on the fact that Bear often got refunds from mortgage originators and did not immediately pass them on to the institutional investors. But while that may strike prosecutors as mean, we're told that the refund commitments for bad mortgages that Bear received from sellers of loans were not always identical to the terms Bear offered when it turned around and sold those loans to investors. So if Bear got a refund and didn't immediately pass it on to investors, it may have been because it wasn't required to do so.


 
Perhaps in the rush to prepare for Tuesday's press conference, prosecutors didn't have time to compile a complete list of the transactions at issue. Or maybe they have no earthly idea and don't care, because the real goal is to get J.P. Morgan to write a big settlement check.



Mr. Schneiderman nonetheless said last week that the Morgan complaint would be a "template" for more suits in the future. It would be nice to know which deals Mr. Schneiderman is talking about, because some institutional investors have already filed their own suits. This has saved the New York AG lots of work because he was able to cut and paste from those suits to create his.



The work was no doubt even easier after he hired Karla Sanchez, who filed such suits as a partner at the Patterson Belknap law firm and is now New York's Executive Deputy AG for "economic justice." She was working on this case until Morgan raised the issue and she was recused. How can anyone now believe this has been a disinterested investigation?


***



As for the federal government's role, it's helpful to recall some recent history: In the mid-2000s, Bear Stearns became—outside of Fannie Mae and Freddie Mac—perhaps the most reckless financial firm in the housing market. Bear was the smallest of the major Wall Street investment banks. But instead of allowing market punishment for Bear and its creditors when it was headed to bankruptcy, the feds decided the country could not survive a Bear failure. So they orchestrated a sale to J.P. Morgan and provided $29 billion in taxpayer financing to make it happen.



The principal author of the Bear deal was Timothy Geithner, who was then the president of the Federal Reserve Bank of New York and is now the Secretary of the Treasury. Until this week, we didn't think the Bear intervention could look any worse. But now Mr. Geithner's colleagues are telling taxpayers that they were forced to bail out not only financiers but fraudsters as well?




Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

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