Subject: Re: E-Mails Suggest JPMorgan Knew Flaws of Some Loans
From: "Alexander Snyder Mackler" <[email-masked]>
To: <[email-masked]>
Cc: <[email-masked]>, "Jim Smith" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>
Date: Thu, 7 Feb 2013 09:25:21 -0500

Here's hoping JPMC avoids settlement long enough that Dexia discovers some
things that'll give DOJ no choice but to pursue.

On Thu, Feb 7, 2013 at 9:23 AM, <[email-masked]> wrote:

> It is absolutely amazing that a private litigant could uncover all this
> and DOJ could not. Clearer and clearer that it just was not a DOJ priority.
>
> Good news is that in the RBS case they successfully brought a  criminal
> case and said they are going after criminal cases against traders. NYT
> points out that RBS and UBS are the "first units of a big bank to agree to
> criminal charges in more than a decade"
>
> ------------------------------
> *From: [email-masked]
> *To: *"Jim Smith" <[email-masked]>, "Hunter Biden" <
> [email-masked]>, "Ted Kaufman" <[email-masked]>, "Eric
> Schwerin" <[email-masked]>, "Alexander Snyder-Mackler" <
> [email-masked]>
> *Sent: *Thursday, February 7, 2013 8:18:53 AM
> *Subject: *E-Mails Suggest JPMorgan Knew Flaws of Some Loans
>
>
> DEALBOOK
> E-Mails Suggest JPMorgan Knew Flaws of Some Loans
> **Jamie Dimon, chief of JPMorgan Chase.
> YURI GRIPAS/REUTERS
>
> By JESSICA SILVER-GREENBERG
>
> When an outside analysis uncovered serious flaws with thousands of home
> loans, JPMorgan Chase<http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org> executives
> found an easy fix.
>
> Rather than disclosing the full extent of problems like fraudulent home
> appraisals and overextended borrowers, the bank adjusted the critical
> reviews, according to documents filed early Tuesday in federal court in
> Manhattan. As a result, the mortgages, which JPMorgan bundled into complex
> securities, appeared healthier, making the deals more appealing to
> investors.
>
> The trove of internal e-mails and employee interviews, filed as part of a
> lawsuit by one of the investors in the securities, offers a fresh glimpse
> into Wall Street's mortgage machine, which churned out billions of dollars
> of securities that later imploded. The documents reveal that JPMorgan, as
> well as two firms the bank acquired during the credit crisis, Washington
> Mutual<http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.html?inline=nyt-org>
>  and Bear Stearns<http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org>,
> flouted quality controls and ignored problems, sometimes hiding them
> entirely, in a quest for profit.
>
> The lawsuit, which was filed by Dexia, a Belgian-French bank, is being
> closely watched on Wall Street. After suffering significant losses, Dexia
> sued JPMorgan and its affiliates in 2012, claiming it had been duped into
> buying $1.6 billion of troubled mortgage-backed securities. The latest
> documents could provide a window into a $200 billion case that looms over
> the entire industry. In that lawsuit, the Federal Housing Finance Agency,
> which oversees Fannie Mae<http://dealbook.on.nytimes.com/public/overview?symbol=FNMA&inline=nyt-org>
>  and Freddie Mac<http://dealbook.on.nytimes.com/public/overview?symbol=FMCC&inline=nyt-org>,
> has accused 17 banks of selling dubious mortgage securities to the two
> housing giants. At least 20 of the securities are also highlighted in the
> Dexia case, according to an analysis of court records.
>
> In court filings, JPMorgan has strongly denied wrongdoing and is
> contesting both cases in federal court. The bank declined to comment.
>
> Dexia's lawsuit is part of a broad assault on Wall Street for its role in
> the 2008 financial crisis, as prosecutors, regulators and private investors
> take aim at mortgage-related securities. New York's attorney general, Eric
> T. Schneiderman<http://topics.nytimes.com/top/reference/timestopics/people/s/eric_t_schneiderman/index.html?inline=nyt-per>,
> sued JPMorgan last year over investments created by Bear Stearns between
> 2005 and 2007.
>
> Jamie Dimon<http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per>,
> JPMorgan's chief executive, has criticized prosecutors for attacking
> JPMorgan because of what Bear Stearns did. Speaking at the Council on
> Foreign Relations<http://topics.nytimes.com/top/reference/timestopics/organizations/c/council_on_foreign_relations/index.html?inline=nyt-org> in
> October, Mr. Dimon said the bank did the federal government "a favor" by
> rescuing the flailing firm in 2008.
>
> The legal onslaught has been costly. In November, JPMorgan, the nation's
> largest bank, agreed to pay $296.9 million to settle claims by the Securities
> and Exchange Commission<http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org> that
> Bear Stearns had misled mortgage investors by hiding some delinquent loans.
> JPMorgan did not admit or deny wrongdoing.
>
> "The true price tag for the ongoing costs of the litigation is
> terrifying," said Christopher Whalen, a senior managing director at Tangent
> Capital Partners.
>
> The Dexia lawsuit centers on complex securities created by JPMorgan, Bear
> Stearns and Washington Mutual during the housing boom. As profits soared,
> the Wall Street firms scrambled to pump out more investments, even as
> questions emerged about their quality.
>
> With a seemingly insatiable appetite, JPMorgan scooped up mortgages from
> lenders with troubled records, according to the court documents. In an
> internal "due diligence scorecard," JPMorgan ranked large mortgage
> originators, assigning Washington Mutual andAmerican Home Mortgage<http://topics.nytimes.com/top/news/business/companies/american_home_mortgage_investment_corporation/index.html?inline=nyt-org> the
> lowest grade of "poor" for their documentation, the court filings show.
>
> The loans were quickly sold to investors. Describing the investment
> assembly line, an executive at Bear Stearns told employees "we are a moving
> company not a storage company," according to the court documents.
>
> As they raced to produce mortgage-backed securities, Washington Mutual and
> Bear Stearns also scaled back their quality controls, the documents
> indicate.
>
> In an initiative called Project Scarlett, Washington Mutual slashed its
> due diligence staff by 25 percent as part of an effort to bolster profit.
> Such steps "tore the heart out" of quality controls, according to a
> November 2007 e-mail from a Washington Mutual executive. Executives who
> pushed back endured "harassment" when they tried to "keep our discipline
> and controls in place," the e-mail said.
>
> Even when flaws were flagged, JPMorgan and the other firms sometimes
> overlooked the warnings.
>
> JPMorgan routinely hired Clayton Holdings and other third-party firms to
> examine home loans before they were packed into investments. Combing
> through the mortgages, the firms searched for problems like borrowers who
> had vastly overstated their incomes or appraisals that inflated property
> values.
>
> According to the court documents, an analysis for JPMorgan in September
> 2006 found that "nearly half of the sample pool" - or 214 loans - were
> "defective," meaning they did not meet the underwriting standards. The
> borrowers' incomes, the firms found, were dangerously low relative to the
> size of their mortgages. Another troubling report in 2006 discovered that
> thousands of borrowers had already fallen behind on their payments.
>
> But JPMorgan at times dismissed the critical assessments or altered them,
> the documents show. Certain JPMorgan employees, including the bankers who
> assembled the mortgages and the due diligence managers, had the power to
> ignore or veto bad reviews.
>
> In some instances, JPMorgan executives reduced the number of loans
> considered delinquent, the documents show. In others, the executives
> altered the assessments so that a smaller number of loans were considered
> "defective."
>
> In a 2007 e-mail, titled "Banking overrides," a JPMorgan due diligence
> manager asks a banker: "How do you want to handle these loans?" At times,
> they whitewashed the findings, the documents indicate. In 2006, for
> example, a review of mortgages found that at least 1,154 loans were more
> than 30 days delinquent. The offering documents sent to investors showed
> only 25 loans as delinquent.
>
> A person familiar with the bank's portfolios said JPMorgan had reviewed
> the loans separately and determined that the number of delinquent loans was
> far less than the outside analysis had found.
>
> At Bear Stearns and Washington Mutual, employees also had the power to
> sanitize bad assessments. Employees at Bear Stearns were told that they
> were responsible for "purging all of the older reports" that showed flaws,
> "leaving only the final reports," according to the court documents.
>
> Such actions were designed to bolster profit. In a deposition, a
> Washington Mutual employee said revealing loan defects would undermine the
> lucrative business, and that the bank would suffer "a couple-point hit in
> price."
>
> Ratings agencies also did not necessarily get a complete picture of the
> investments, according to the court filings. An assessment of the loans in
> one security revealed that 24 percent of the sample was "materially
> defective," the filings show. After exercising override power, a JPMorgan
> employee sent a report in May 2006 to a ratings agency that showed only 5.3
> percent of the mortgages were defective.
>
> Such investments eventually collapsed, spreading losses across the
> financial system.
>
> Dexia, which has been bailed out twice since the financial crisis, lost
> $774 million on mortgage-backed securities, according to court records.
>
> Mr. Schneiderman, the New York attorney general, said that overall losses
> from flawed mortgage-backed securities from 2005 and 2007 were $22.5
> billion.
>
> In a statement shortly after he sued JPMorgan Chase, Mr. Schneiderman said
> the lawsuit was a template "for future actions against issuers of
> residential mortgage-backed securities that defrauded investors and cost
> millions of Americans their homes."
>
>
> Sent via iPhone
>
>

-- 

Alexander Snyder Mackler
(302) 598-867