fi-cri nostalgia

New York AG Sues Picked-Over Carcass of Bear Stearns for Mortgage Fraud

New York Attorney General Eric Schneiderman speaks during a news conference at the Justice Department on January 27, 2012 in Washington, DC.
New York Attorney General Eric Schneiderman Photo: Mark Wilson/Getty Images

From time to time, the government gets a crazy idea: What if we tried to bring charges against some of the people who caused the financial crisis?

Usually, this line of thinking doesn’t end well. Sometimes, the government loses the case outright. Sometimes, the government loses the case but gets a nice note from the jury to make itself feel better. And other times, the government either drops the investigation or, in civil cases, gets a settlement from the bank in question, which gets to pay to make the lawsuit go away without admitting it did anything wrong.

Yesterday, another government task force announced it was trying again. The Residential Mortgage-Backed Securities Working Group’s co-chair, New York Attorney General Eric Schneiderman, sued JPMorgan Chase for mortgage-related frauds that Bear Stearns allegedly committed in the run-up to the housing crisis. JPMorgan bought Bear Stearns in a government-brokered fire sale in March 2008.

The actual complaint itself (PDF, via the Times) will sound familiar to those who have followed the aftermath of the crisis. Bear Stearns, the task force alleges, “systematically failed to fully evaluate the loans” it packaged into mortgage-backed securities in order to sell to investors, then “kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans” when it did sell them.

There is other stuff inside the complaint but little that hasn’t been alleged before. JPMorgan Chase spokesman Joe Evangelisti told the Times he was “disappointed” that the task force decided to sue JPMorgan for stuff that happened on Bear’s watch, with “recycled claims already made by private plaintiffs.”

One of those recycled claims is a truly classy crisis-era trader e-mail that is included as proof that Bear knew that the terrible securities it was selling were terrible but sold them anyway:

Other internal communications reflect Defendants’ awareness of the bad quality of loans that were being included in other securitizations. In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007-1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT” and a “shit breather.”

The real news about yesterday’s suit is that the MBS task force, the creation of which was announced by President Obama in his last State of the Union address in January, finally up and did something. The group was tasked with rooting out wrongdoers in the lead-up to the financial crisis. According to Teri Buhl, who did early reporting on Bear Stearns’s MBS practices, Schneiderman, et al., began their investigation of Bear Stearns by building on evidence already uncovered by the bank’s investors in private suits.

That makes sense, given the surface similarities between the task force’s complaint and earlier suits brought against Bear by companies like Ambac. But it hardly inspires confidence that the government is sitting on an ironclad case here. With little more than a recycled set of two-year-old e-mails as evidence, and no individual traders named, it’s hard to see how this lawsuit will fare better than all the other attempts by government agencies to win big, meaningful settlements from banks who helped hasten the crisis.

Oh, and it’s a civil case, not a criminal one. Which means that, even if the RMBSWG suit does succeed, anyone hoping to see Wall Streeters carted off in handcuffs will have to wait for another day.

New York AG Sues Bear Stearns for Mortgage Fraud