The lawsuit filed by New York Attorney General Eric Schneiderman against J.P. Morgan for flawed mortgage-backed securities issued by Bear Stearns arrives a bit late in the game.
It is the first case to emerge from the Residential Mortgage-Backed Securities Working Group, led by Mr. Schneiderman, which was formed in January.
Yet it contains little new information about how Wall Street bundled together several poorly underwritten subprime mortgages and sold them to investors on the promise that they were safe investments. And as a civil case, it may result in a finding of a violation, but that would come only after years of discovery and legal maneuvering.
Indeed, the complaint filed by Mr. Schneiderman quotes information from, among other sources, the Financial Crisis Inquiry Commission's report issued two years ago to show how mortgage underwriting standards were largely ignored by Bear Stearns.
The claimed losses from the instruments issued in 20 06 and 2007 total approximately $22.5 billion. That is not insignificant but hardly makes Bear Stearns the worst offender, or a unique actor in this area.
A number of similar lawsuits have been filed claiming that Wall Street firms failed to conduct anything close to the due diligence they promised in their offering materials for securities that lost billions of dollars in value when the mortgage market collapsed.
For example, the National Credit Union Administration is pursuing claims against a number of large banks, including J.P. Morgan, for losses from the residential mortgage-backed securities bought by credit unions before the financial crisis, and has already settled with others for $170 million.
A Justice Department press release noted that it helped in the New York case by reviewing “more than 50 deposition transcripts taken in other litigation for significant evidence.â€
What sets this complaint apart is that it is not limited to just a f ew particular transactions. Unlike private investors who can file claims only for the specific securities they bought, Mr. Schneiderman assails the entire residential M.B.S. operation at Bear Stearns as designed to cater to the mortgage originators who supplied it with product to package than with protecting the buyers of the securities it was churning out.
The lawsuit cites the typically vulgar or callous e-mails that seem to be a staple of Wall Street's sales culture as evidence of Bear Stearns's disregard for the buyers. One internal e-mail described a securitization in scatological terms, while another sought to “close this dog†because it looked like a “going out of business sale.â€
The most interesting claim is not that Bear Stearns had faulty underwriting and due diligence â€" that is hardly a surprise as firms did their best to push out mortgage bonds while the market remained hot. It is the allegation that the firm settled claims about bad mort gages that were put into its securities by taking payments from the mortgage originators and then keeping the money for itself rather than passing it on to the securities holders.
If true, that goes beyond just shoddy practices to something much more akin to theft by keeping payments that did not belong to the firm.
How much money may be involved is not clear, however, and Bear Stearns's dealings with the mortgage originators might not have been improper if it accounted for the funds under the requirements of the securities offering documents.
The decision to pursue civil charges under New York's Martin Act means that the state's attorney general will not have to prove fraudulent intent, only that the firm was negligent in making any false or misleading disclosures. While easier to prove, that also indicates that the evidence to prove fraud was not strong enough to bring more serious charges.
Like so many cases related to the financial crisis, no indi viduals are named in the complaint. Nor does it appear that any criminal charges will emerge this long after Bear Stearns was pushed into the arms of J.P. Morgan by the federal government in a transaction routinely described as a fire sale.
Even naming J.P. Morgan as a defendant is a bit of a misnomer because the bank was not involved in the misconduct in securitizing questionable subprime mortgages. So any penalty that might be imposed would simply add to the costs of the merger rather than constitute any real punishment of a wrongdoer.
There is a chance the case will go to trial, but I think that likelihood is small. As a spokesman for J.P. Morgan stated, “We're disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record - instead relying on recycled claims already made by private plaintiffs.â€
Those are not really fighting words from a company that believes it has been unfairly accused. The complaint has little to do with the J.P. Morgan's current operations, so the case will probably settle once the two sides can come up with a suitable amount to be paid, because there are no remedial measures that would have to be put in place. And that may be all there is to the case.
New York AG v JP Morgan Bear Stearns Mortgage Complaint Oct 1 2012
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.
