Wednesday, October 3, 2012

NY AG Sues JP Morgan

This may not be as good as it seems, David Dayen (the best reporter on this subject) has the rundown:
Late yesterday, New York Attorney General Eric Schneiderman filed a lawsuit made up of years-old evidence against JPMorgan Chase, over deceptive practices related to the sale of $87 billion in Bear Stearns mortgage-backed securities at the height of the housing bubble. The lawsuit is closely modeled after one brought against the same defendants by the mortgage bond insurer Ambac, a suit written by a current Executive Deputy Attorney General for Economic Justice in Schneiderman’s office.

The lawsuit only uses state and not federal law, and seems to have been borne of little if any new investigation, though the New York AG’s office claims to have brought the lawsuit “under the aegis” of the Residential Mortgage Backed Securities working group, the task force inaugurated in January to probe securitization fraud in the banking industry before the financial crisis. This is the first suit said to be from the RMBS working group.

But most of the evidence and legal theories in the case come from investigations and suits going back several years, and there’s no reason it couldn’t have been filed at that time. As the relevant statute of limitations under New York’s Martin Act (which has a lower burden of proof, as it does not require demonstrating intent to defraud, only that the fraud occurred) is six years, this will only encompass fraud from late 2006 and 2007, the last vestiges of the housing bubble. This delay in bringing the case cost tens of billions of potential exposure for JPMorgan Chase. And more than anything, the lack of federal participation in the suit shows that the federal agencies involved in the task force are simply disinterested in prosecution, forcing Schneiderman to cobble together an off-the-shelf suit from other sources to make it look like this move against the banks represents anything real. The timing, one month before voters go to the polls in the Presidential election, is similarly obvious.
The larger point is this. Not only does there seem to be no new evidence or investigations or legal theories in this case, but the bulk of it was copied off a separate case filed by someone in Schneiderman’s office years ago. Gretchen Morgenson says that the subpoenas in the case all came from Schneiderman’s office in April 2011, long before the RMBS working group ever existed. The Justice Department will apparently try to take some credit for interviewing Clayton Holdings employees in the case, but again, the Clayton Holdings element of this case has been public knowledge through the FCIC and Cuomo’s time as AG going back many years. And if DoJ was so helpful, why didn’t they bring any charges? No federal charges were filed in this case, which represents fairly obvious federal securities fraud. And they havelonger statutes of limitations available to them, meaning they would be able to sue for more money, since the cutoff would not be October 2006 but much further back.

Nothing here leads me to believe that the task force played any meaningful role. Schneiderman, getting antsy with just a month to go until the election, took a case off his shelf he had been working on, thanks to his deputy, from the moment he got into the AG’s office. And the evidence that he threw it together quickly comes from the fact that he got the name of Bear Stearns’ auditor wrong in the filing. Bad lawyering.

And just because a suit gets filed, doesn’t mean it will lead to anything approaching accountability. The suit is purely civil and does not quantify damages; all it says is that investors lost $22.5 billion on the bad securities in the time frame under the Martin Act’s statute of limitations, from late 2006 to 2007. And Schneiderman’s track record is weak. He filed suit against MERS and the banks who used it in January 2012, and two months later settled for an almost meaningless $25 million. While Schneiderman claimed that the settlement was only partial, we never heard anything about it again.
The most significant revelation about this investigation is complete farce that the national task force is. It's worth remembering that we were told this was the big prize these AGs were getting for ending their holdout over the robosigning settlement. Some prize, but then again, that's not an accident, it was designed to be this useless.

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