E-mails Suggest Bear Stearns Cheated Clients Out of Billions

I don't have any hopes whatsoever that these guys will serve jail time. 
Most likely there will be a settlement for pennies on the dollar.  Fraud
is just another business model these days.  The crime pays far more than
any actual penalty imposed by regulators.

regards,
-Lance

-------------------
http://www.theatlantic.com/business/archive/2011/01/e-mails-show-bear-stearns-cheated-clients-out-of-billions/70128/

E-mails Suggest Bear Stearns Cheated Clients Out of Billions
JAN 25 2011, 1:01 AM ET9
Lawsuit alleges the bank took extreme measures to defraud investors, and
now JPMorgan may be on the hook

Former Bear Stearns mortgage executives who now run mortgage divisions of
Goldman Sachs, Bank of America, and Ally Financial have been accused of
cheating and defrauding investors through the mortgage securities they
created and sold while at Bear. According to e-mails and internal audits,
JPMorgan had known about this fraud since the spring of 2008, but hid it
from the public eye through legal maneuvering. Last week a lawsuit filed
in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and
JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far
as 2005, highlight Bear traders telling their superiors they were selling
investors like Ambac a "sack of shit."

News of internal whistleblowers coming forward from Bear's mortgage
servicing division, EMC, was first reported by The Atlantic in May of last
year. Ex-EMC analysts admitted they were sometimes told to falsify
loan-level performance data provided to the ratings agencies who blessed
Bear's billion-dollar deals. But according to depositions and documents in
the Ambac lawsuit, Bear's misdeeds went even deeper. They say senior
traders under Tom Marano, who was a Senior Managing Director and Global
Head of Mortgages for Bear and is now CEO of Ally's mortgage operations,
were pocketing cash that should have gone to securities holders after Bear
had already sold them bonds and moved the loans off its books.

Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear
and is now the head of mortgages and securitization for Bank of America,
was a key player 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. He was joined in this scheme by Jeff
Verschleiser, his peer and Senior Managing Director on the mortgage and
asset-backed securities trading desk and head of whole loan trading. He is
now an executive in Goldman Sachs' mortgage division.

According to the lawsuit, the 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. The Marano-led traders also cut the time
allowed for early payment defaults, without telling the bond investors.
That way, Bear could quickly securitize defective loans, without leaving
enough time for investors to do their own due diligence after the bonds
were sold and put-back any bad loans to Bear.

The traders were essentially double-dipping -- getting paid twice on the
deal. How was this possible? Once the security was sold, they didn't have
a legal claim to get cash back from the bad loans -- that claim belonged
to bond investors -- but they did so anyway and kept the money. Thus, Bear
was cheating the investors they promised to have sold a safe product out
of their cash. According to former Bear Stearns and EMC traders and
analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the
decision-makers for the double dipping scheme, and thus, are named as
individual defendants in the suit.

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to
Keith Lind, a Managing Director on the trading desk, referring to a
particular bond, SACO 2006-8, as "SACK OF SHIT [2006-]8" and said, "I hope
your [sic] making a lot of money off this trade."

It's this blatant internal awareness inside the Bear mortgage trading
division that the Ambac suits says led Bear to implement an
across-the-board strategy to disregard its contractual promises and
conceal the defective loans. By JPMorgan taking over Bear, it became the
successor of interest in Bear Stearns. As the lawsuit lays out, JPMorgan
is responsible for the flagrant accounting fraud started by Bear designed
to avoid, and has continued to avoid, recognition of vast off-balance
sheet exposure relating to its contractual repurchase agreements. This
allowed executives to reap tens of millions of dollars in compensation
from a bank that wouldn't have been able to buy Bear without tax payer
assistance.

80% of Loans Went Bad Almost Immediately

In 2007, when Ambac started to realize something was very wrong with its
high-rated bonds, it demanded Bear provide loan-level detail and reviewed
695 non-performing loans in its portfolio. Ambac's audit concluded that 80
percent of the loans showed an early payment default. This meant they
should have never have been packed in the bonds Bear sold and were
required to be repurchased. Bear refused, and of course had already been
pocketing buyback money for itself from the originators. Bear also never
told investors that its auditor Price Waterhouse and Coopers submitted an
internal review in August 2006 that this repurchase process was not
in-line with its due diligence standards and not typical for the industry.
By January 2007, a Bear internal audit also reported the firm had
collected $1.7 billion in repurchase claims -- a 227% increase over the
previous year. Yet Marano's group of traders continued their double-dip
payment scheme and kept selling the toxic loans with full awareness of the
poor quality of the due diligence.

Jeffrey Verschleiser even said in an e-mail that he knew this was an
issue. He wrote to his peer Mike Nierenberg in March 2006, "[we] are
wasting way too much money on Bad Due Diligence." Yet a year later nothing
had changed. In March 2007, Verschleiser wrote to Nierenberg again about
the same due diligence firm, "[w]e are just burning money hiring them."

Then in November 2007, Verschleiser wrote to his risk committee that he
knew insurers for mortgage securities were going to have big financial
problems. He suggested they multiply by ten times the short bet he'd just
made against stocks like Ambac. These e-mails show Verschleiser's trading
desk bragging to firm leadership that he made $55 million off shorting
insurers' stock in just three weeks.

Eventually, as Ambac kept demanding a repurchase of the bad loans, Bear
acknowledged in late 2007 it would have to buy some back. The lawsuit
lists over $600 million in claims with $1.2 billion in damages from the
soured mortgage securities it invested in and insured against. But
according to the lawsuit, in the spring of 2008, JPMorgan dismissed an
outside audit review of the loans' need to be repurchased and once again
refused to pay Ambac. The suit asserts JPMorgan knew a repurchase would
result in a huge accounting liability that would put their balance sheet
in serious trouble at that time.

Last week, JPMorgan CEO Jamie Dimon said it will take years to get through
mortgage litigation risk the bank inherited and had set aside around $9
billion for litigation-related risk. Yet in the bank's January earnings
call, Dimon suggested that the bank may not have to buy back any soured
mortgages from private investors and said that the issue is "not that
material" for JPMorgan. Still, Ambac recently won a court order in
December to add accounting fraud against JPMorgan to its suit, which can
double or triple lawsuit awards. So it's hard to tell whether America's
largest bank is prepared to pay for the sins of Bear. JPMorgan did fight
tooth and nail for the Ambac suit not to be made public, however, because
the firm argued it could damage the reputations of senior bank executives
currently working in the industry. Individuals named as defendants
included: Jimmy Cayne, Alan "ACE" Greenberg, Warren Spector, Alan
Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein,
Jeffrey Verschleiser, and Michael Nierenberg.

Ambac's lawsuit is led by Eric Haas of Patterson Belknap Webb & Tyler LLP.
Depositions show internal Bear executives saying Nierenberg and
Verschleiser were responsible for deciding how much risk to take when
acquiring loans and for aspects of the securitization process. They
reported up to Marano. Testimony shows Marano would have known about the
decisions his head traders were making. When asked about these
accusations, Nierenberg's, Marano's, and Verschleiser's current employers
had no comment. The defendants' lawyers at Greenberg Traurig LLP failed to
respond to calls for comment.

A public hearing is currently scheduled to be held by the New York State
assembly regarding whether legal action should be brought against banks
for misleading insurers about mortgage related securities. If approved,
the New York Attorney General will likely be asked to bring criminal fraud
charges against these banks. Now we must wait and see if JPMorgan will
settle or go to trial -- or if the bank tries to claw back tens of
millions of dollars in pay from the former Bear executives.


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