NY AG goes after JPM- Follow up
In its editorial page, the Wall Street Journal took a shot at NY AG, Eric Schneiderman, for filing a suit against JP Morgan Chase for misrepresentations made by Bear Stearns (later bought by JPM at request of feds) to investors of mortgage backed securities. Somehow, WSJ thinks that 1) BS (how appropriate) was “sloppy” in bundling loans into securitized trusts rather than knowingly or recklessly putting loans into the trusts and screwing investors; 2) the fact that BS bounced loans back to loan originators but did not pass the savings along to duped investors was OK because it was somehow allowed by the trust documents, and 3) it was unfair to JPM to help the government out and then get sued.
Let’s deal with those arguments. First, BS was just sloppy. I guess the WSJ would want you to believe that originators and mortgage brokers were making loans, and then afterwards BS got the bright idea to package those loans. So, BS went out and bought loans for a given securitized trust. Unfortunately, BS got hoodwinked and got stuck with lots of bad loans. Don’t think it happened that way. BS put together hundreds of trusts which contained thousands of loans. Given the time constraints of marketing securitized trusts, the issuer cannot willy nilly buy loans for a trust. BS made deals upfront with originators and brokers to fund mortgages, and to buy them if they met with BS’s underwriting guidelines. So, BS was telling the originators and brokers exactly what type of loans it would buy. I just settled a case with JPM involving BS trusts. The loan originator, in a sworn deposition, testified that BS told him what had to be in the loan documents and what the borrower had to produce to get the loan. According to the broker, without following BS’s underwriting guidelines, BS would not buy the loans. So, BS not only knew what it was getting but got exactly what it asked for.
Second, trusts require insurance including credit default swaps, to protect investors against the bad loans within the trust. One of those was Ambac which sued BS and JPM because BS was bouncing loans back to originators (and getting a refund) while it made a claim against the insurance. So, BS was getting paid twice. Of course, those loans fell out of the trust. Say 10% fell out of the trust. That means that if BS did not pass the savings along to investors, the investors were being short changed by 10% of the proceeds used to fund that trust. WSJ praises BS for it slickness in drafting documents which did require a pass thru to investors. So, in reality, BS either beat the insurer or the investor or both. Very slick.
Finally, JPM purchased BS at an incredible discount. Why? Because JPM knew that it was buying a lot of crappy paper, and paid accordingly for the assets of BS. So, JPM had to know that there would be fallout from the BS purchase. I recently settled a case with JPM over predatory loans made based on BS underwriting criteria. Got a fair amount of money from JPM. I am sure that JPM was not taken by surprise when they first say my lawsuit.
I like the WSJ and read it everyday. However, I do not buy everything it tries to sell.